Alerts & Updates 5th Jan 2022

‘Opt-out’ clauses – Indian courts continue to shun unilateral arbitration agreements

Authors

Alok Jain Partner | Mumbai

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Tata Capital Housing Finance Ltd v Shri Chand Construction and Apartment Private Limited Through Its Director Mr. Nikhil Agarwal and Another

  • Introduction

    In Tata Capital Housing Finance Ltd v Shri Chand Construction and Apartment Private Limited, the Delhi High Court has held that unilateral opt-out clauses (clauses that grant unilateral right to one party to give a go bye to arbitration) cannot amount to a valid arbitration agreement since the clause lacks an essential element of an arbitration agreement, i.e., “mutuality,” in as much as, the clause only gives one party, the right to walk out of arbitration.

    The Delhi High Court has further held that under section 7 of the Arbitration and Conciliation Act, 1996 (Arbitration Act), the parties are not at liberty to split the claims which arise out of the same defined legal relationship, i.e., there cannot be a valid arbitration clause providing for arbitration of claims of one party and providing for the remedy of the Court/any other fora for the claim of the other party.

  • Background

    The Respondent, Shri Chand Construction and Apartment Private Limited (Chand Construction or Respondent) had availed financial facility from the Appellant, Tata Capital Housing Finance Ltd (TCHFL or Appellant) for purchase of a property. As security for the said financial facility, Chand Construction had handed over unto TCHFL original documents of the property.

    Upon repayment of the entire financial facility, Chand Construction sought the return of the original documents in order to resell the property. As TCHFL had lost/misplaced the original documents of the property, the resale was allegedly delayed, and the consideration thereof allegedly reduced. Resultantly, Chand Construction filed a suit before the Ld. Single Judge of the Delhi High Court, inter alia seeking damages.

  • Proceedings before the Ld. Single Bench

    In the suit before the Ld. Single Judge, TCHFL filed an application under section 8 of the Arbitration Act contending that in view of the arbitration clause contained in the loan agreement, the disputes should be referred to arbitration.

    Clause 12.18 of the loan agreement, provided for the resolution of disputes through arbitration. However, it also stated that notwithstanding anything contained in the said clause, in the event TCHFL comes under the purview of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) or the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) – which enables TCHFL to enforce the security under the SARFAESI Act or proceed to recover dues from the Borrower under the SARFAESI Act and/or the DRT Act – the arbitration provisions contained therein shall, at the option of TCHFL, cease to have any effect. Thus, the dispute resolution clause, in effect entitled TCHFL and only TCHFL to give a go-bye to arbitration clause and pursue its claim under the SARFAESI Act or the DRT Act. No such right was given to Chand Construction, who was bound to arbitrate its claims.

    The Ld. Single Judge upon a perusal of clause 12.18, held that section 7 of the Arbitration Act does not permit for claims of one of the parties to be adjudicated by arbitration and the claims of the other party to be adjudicated by any other mode. Thus, the Ld. Single Judge dismissed the application filed by the Appellant stating that the arbitration agreement was invalid.

  • Proceedings before the Division Bench

    In the appeal, TCHFL sought to overturn the order of the Ld. Single Judge citing the decision of the Supreme Court in M.D. Frozen Foods Exports (P) Ltd. v Hero Fincorp Ltd[(2017) 16 SCC 741] in support of its argument that it can elect to proceed with arbitration as the SARFAESI Act is a remedy in addition to the provisions of the Arbitration Act. TCHFL also contended that based on the decision of the Supreme Court in Zhejiang Bonly Elevator Guide Rail Manufacture Co. Ltd. v Jade Elevator Components, [(2018) 9 SCC 741], once the option (choice of forum) in the agreement was exercised, arbitration could be proceeded with.

    Chand Construction opposed the appeal citing various decisions of the Delhi High Court wherein arbitration clauses which gave a party the unilateral right to refer disputes to arbitration were found to be invalid for lack of mutuality.

  • Findings of the Court

    The Division Bench agreed with the contentions of Chand Construction that mutuality was essential to an arbitration agreement. Relying on the view taken by the Delhi High Court in the case of Union of India v Bharat Engineering Corporation [1977 SCC OnLine Del 45], the Division Bench held that clause 12.18 negates the essential element of an arbitration agreement, which is mutual promise to submit differences to arbitration. The Division Bench also relied on the case of Bhartia Cutler Hammer Ltd. AVN Tubes Ltd. [1991 SCC OnLine Del 322], wherein the court had struck down an arbitration agreement that gave the right to invoke arbitration only to the defendant. The Division Bench observed that the wording of the clause 12.18 allowed only TCHFL to abandon arbitration at its sole choice. This unilateral option i.e., exclusive right to abandon arbitration would be against the public policy. The Division Bench agreed with the Ld. Single Judge that by virtue of section 7 of the Arbitration Act, the parties are not at the liberty to split the claims which arise out of the same defined legal relationship- that is – there cannot be a valid arbitration clause providing for arbitration of claims of one party and providing for the remedy of the Court or any other fora for the claim of the other party. This would not only be permitting splitting up of claims and causes of action, but also result in multiplicity of proceedings and a possibility of conflicting judgements on the same issues.

    The Division Bench thus upheld the decision of the Ld. Single Judge and dismissed the appeal.

  • Analysis

    Though this issue is not new, and we have authored an extensive article on the same which can be found here. where several High Courts have taken a different approach. For a contra view see Kedarnath Atmaram v Kesoram Cotton Mills [ILR (1950) 1 Calcutta 550 (13)] and New India Assurance Co. Ltd. v Central Bank of India and Ors. [AIR 1985 Cal 76]. Also, while the reasoning in Union of India v Bharat Engineering Corporation [1977 SCC OnLine Del 45] does support the present decision, the final outcome in that matter seemingly did not result in the invalidation of the unilateral arbitration agreement. In fact, a key aspect of that decision was that mutuality would kick in once the option was exercised. This seems to have not been brought to the attention of the Division Bench.

    While the Division Bench’s decision sets the current precedent for unilateral opt-out clauses, it appears that the debate whether to foster mutuality or respect party autonomy (at the time of entering into the contract parties have in fact consented to such clauses pursuant to commercial sensibilities) continues to rage on. Were this issue to travel to the Supreme Court, considering the trend of the Supreme Court decisions wherein the unilateral right of appointment of an arbitrator has been invalidated [see Supreme Court’s decision in Perkins Eastman Architects DPS v. HSCC (India) Ltd. (AIR 2020 SC 59)] it would be likely that the scales tip in favor of mutuality. This may bode well for balancing bargaining power in respect of dispute resolution clauses in India but end up diminishing the notion of party autonomy to some extent.