Allowed

Sri B S Jayakumara Swamy v. M/S Rajesh Exports Limited

Karnataka HC8 Jul 2021MFA/2411/2019

Case brief

AI extract

What is this about?

The High Court of Karnataka held that disputes involving foreclosure or redemption of mortgage property are not arbitrable. The court set aside the trial court's judgment confirming an arbitral award, relying on Supreme Court precedents defining such disputes as 'rights in rem' requiring adjudication in a public forum.

What did the court decide?

The impugned judgment dated 11.02.2019 and the Arbitral Award dated 06.03.2011 are set aside; appeal allowed.

Sri B S Jayakumara Swamy Vs M/S Rajesh… — Contract and Commercial Disputes | Karnataka HC (2021)

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

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DATED THIS THE 08^TH DAY OF JULY, 2021

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PRESENT

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THE HON’BLE MRS. JUSTICE S. SUJATHA

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AND

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THE HON’BLE MR. JUSTICE E.S. INDIRESH

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MISCELLANEOUS FIRST APPEAL NO.2411 OF 2019 (AA)

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BETWEEN

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Sri B S Jayakumara Swamy S/o Sanjeev Setty Aged about 69 years R/at No.41, I Block, 3^rd Main, 3^rd Phase, 3^rd Stage, Banashankari Bengaluru-560 085. ...Appellant (By Shri V B Shivakumar, Advocate)

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AND

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M/s. Rajesh Exports Limited A Public Limited Company Incorporated under the Companies Act, 1956 Having its registered office At No.4, Batavia Chambers Kumara Krupa Road Kumara Park West Bengaluru-560 001. Rep. by its Authorised Signatory Sri Kaizer A Raja. …Respondent (By Shri P Raju, Advocate)

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This Miscellaneous First Appeal is filed under Section 37(1) (c ) of the Arbitration and Conciliation Act, against the judgment and award dated 11.02.2019 passed in AS.No.27 of 2011 on the file of the XX Additional City Civil and Sessions Judge, Bengaluru, dismissing the suit filed under Sec.34 of the Arbitration and Conciliation Act, 1996.

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This Miscellaneous First appeal coming on for further arguments, this day, INDIRESH J., delivered the following:

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J U D G M E N T

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This appeal is preferred by the plaintiff, challenging the judgment dated 11^th February, 2019 passed in A.S. No.27 of 2011 by the XX Additional City Civil and Sessions Judge, Bangalore City (for short, hereinafter referred to as 'the trial Court’), confirming the Award dated 06^th March, 2011 in ARB/DB/05/2009 by the learned Arbitrator (for short, hereinafter referred to as 'the Arbitral Tribunal’), Bangalore.

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For the sake of convenience, the parties in this appeal are referred to with their status and rank before the Arbitral Tribunal.

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It is the case of the claimant that respondent No.1 before the Arbitral Tribunal had approached the claimant seeking financial assistance for a sum of Rs.70,00,000/- and pursuant to

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the same, first respondent has agreed to furnish the schedule property as security towards repayment of loan by way of registered mortgage deed dated 07^th October, 2008. Clause 14 of the mortgage deed dated 07^th October, 2008 provides of resolution of dispute by way of arbitration proceedings in terms of the Arbitration and Conciliation Act, 1996 ( for short hereinafter referred to as “Act”). It is the case of the claimant that the respondent did not adhere to the terms of the mortgage deed dated 07^th October, 2008 and thereby, appointed Arbitrator to resolve the dispute. Learned Arbitrator, caused notice to both the parties on 26^th September, 2009, directing them to appear before the Arbitral Tribunal on 05^th October, 2009. Claimant appeared on 13^th October, 2009, however, the respondents failed to appear before the Arbitral Tribunal and thereafter, case was adjourned, on consequent dates, without placing the respondents ex-parte, but finally the learned Arbitrator continued the proceedings and recorded the evidence of the claimant, who had deposed as PW1. Claimant has produced 9 documents and same were marked as Exhibits P1 to P9. Learned Arbitrator, by its award dated 06^th March, 2011, allowed

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the claim petition against the respondent No.1 and thereby directed the respondent No.1 (plaintiff) to pay Rs.70,00,000/towards principal amount with the current and future interest at the rate of 24% per annum from 07^th February, 2009, till its realisation. Further, learned Arbitrator directed the first respondent to meet the Arbitrator’s fee and expenses. The claim petition against the second respondent was dismissed. Being aggrieved by the Award dated 06^th March, 2011 passed by the learned Arbitrator, respondent/appellant herein preferred A.S. No.27 of 2011 before the trial Court under Section 34 of the Arbitration and Conciliation Act, 1996 (for short, hereinafter referred to as 'the Act’). The trial Court, after hearing the parties and on considering the material on record, by its judgment dated 11^th February, 2011, dismissed the suit, inter alia, confirmed the award made by the learned arbitrator. Being aggrieved by the impugned judgment dated 11^th February, 2011 passed in A.S.No.27 of 2011, respondent/appellant herein has presented this appeal.

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We have heard Sri V.B. Shivakumar, learned counsel appearing of the appellant and Sri P. Raju, learned counsel appearing for the respondent.

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Sri V.B. Shivakumar, learned counsel appearing for the appellant argued that Award passed by the learned Arbitrator was an ex-parte Award, as the learned Arbitrator has not conducted the proceedings as per Sections 25 and 32 of the Act. He further argued that there is no provision in the Act placing the parties ex-parte by the learned Arbitrator. He points out that the learned Arbitrator failed to maintain the order sheet/note sheet reflecting the day-to-day proceedings. It is the duty of the learned Arbitrator to intimate the appellant/respondent with regard to date of adjournments as culled out in paragraph 4 of the Arbitral award and therefore, the finding recorded by the learned Arbitrator regarding point No.1 requires to be set aside as the award made by the learned Arbitrator is contrary to principles of natural justice.

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Nextly, Sri V.B. Shivakumar argued that the entire arbitral proceedings revolve around the mortgage deed dated

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07^th October, 2008, which is a non-arbitral dispute and only Civil Court is empowered to decide the dispute between the parties in accordance with law. In this regard he referred to the judgment of the Hon'ble Supreme Court in the case of BOOZ ALLEN AND HAMILTON INC. v. SBI HOME FINANCE LIMITED AND OTHERS reported in (2011)5 SCC 532 and argued that the matter relating to resolution of dispute connected with mortgage deed cannot be adjudicated by Arbitral Tribunal and same has to be adjudicated by Courts, which are in public fora constituted under the laws of the Country. He also places reliance on the judgment of the Hon'ble Supreme Court in the case of VIDYA DROLIA v. DURGA TRADING CORPORATION reported in AIR ONLINE 2020 SC 929 and draws the attention of the Court to paragraph 23 of the judgment.

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Thirdly, he contended that appellant has not given consent for appointment of Arbitrator and therefore, award made by the Arbitrator is null and void. He also refers to Section 25 of the Act and contended that no claim statement was sent to the appellant and therefore, the entire proceedings is null and void.

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Hence, he argued that trial Court has not considered the material on record in the right perspective and as such, the impugned judgment passed by the trial Court and the Award passed by the learned Arbitrator is contrary to the law declared by the Apex Court in the aforementioned cases.

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Per contra, Sri P. Raju, learned counsel for the respondent/claimant contended that the appellant herein failed to appear before the learned Arbitrator despite repeated notices having been issued to him. He further contended that Clause 17 of the mortgage deed dated 07^th October, 2008 provides for resolution of dispute by way of Arbitration, to which the claimant has agreed at the time of execution of the mortgage deed dated 07^th October, 2008 and therefore, the finding recorded by the trial Court, confirming the Award of the Arbitral Tribunal is just and proper and same cannot be disturbed in this appeal.

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In the light of the submission made by the learned counsel appearing for the parties, we have given our anxious consideration to the finding recorded by the Trail Court and perused the records. Examination of the record would clearly

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indicate that the parties have entered into registered mortgage deed dated 07^th October, 2008. Clause 17 of the mortgage deed provides for adjudication of dispute, if any, by the sole arbitrator appointed by the mortgagee. Scrutiny of the Arbitral award further substantiate that the appellant herein was placed exparte. However, there is no indication in the documents with regard to maintenance of daily order sheet by the learned Arbitrator. Section 25 of the Act provides for Default of a party. Clause (c) of Section 25 envisages that the learned Arbitrator is empowered to continue the proceedings and make the arbitral award on the evidence before it, in the event if a party fails to appear at an oral hearing or to produce documentary evidence. However, the nomenclature in Section 25 does not authorize the Arbitrator to place the parties ex-parte on their absent as is followed in the civil suits. Section 32 of the Act provides for termination of proceedings and same has to be read with the legislative intent as contemplated under Section 25 of the Act.

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Perusal of the record would indicate that the parties have agreed to resolve their dispute, if any, in the circumstances

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of the case as per Clause 17 of the mortgage deed dated 07^th October, 2008 and the same is referred to in paragraph 18 of the impugned judgment. The recital of the mortgage deed dated 07^th October, 2008 (Exhibit P3) stipulates in unequivocal terms that the said document is nothing but a “Mortgage Deed” creating security in lieu of loan facility of Rs.70,00,000/- availed by the appellant herein. At this juncture, it is relevant to cite the dictum of the Hon'ble Supreme Court in the case of BOOZ ALLEN AND HAMILTON INC (supra), at paragraph 19 of the judgment has observed thus:

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“ 19. Though section 8 does not prescribe any time limit for filing an application under that section, and only states that the application under section 8 of the Act should be filed before submission of the first statement on the substance of the dispute, the scheme of the Act and the provisions of the section clearly indicate that the application thereunder should be made at the earliest. Obviously, a party who willingly participates in the proceedings in the suit and subjects himself to the jurisdiction of the court cannot subsequently turn round and say that the parties should be referred to arbitration in view of the existence of an arbitration agreement. Whether a party has waived his right to seek arbitration

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and subjected himself to the jurisdiction of the court, depends upon the conduct of such party in the suit.

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When plaintiffs file applications for interim relief like appointment of a receiver or grant of a temporary injunction, the defendants have to contest the application. Such contest may even lead to appeals and revisions where there may be even stay of further proceedings in the suit. If supplemental proceedings like applications for temporary injunction on appointment of Receiver, have been pending for a considerable time and a defendant has been contesting such supplemental proceedings, it cannot be said that the defendant has lost the right to seek reference to arbitration. At the relevant time, the unamended Rule 1 of Order VIII of the Code was governing the filing of written statements and the said rule did not prescribe any time limit for filing written statement. In such a situation, mere passage of time between the date of entering appearance and date of filing the application under section 8 of the Act, can not lead to an inference that a defendant subjected himself to the jurisdiction of the court for adjudication of the main dispute. The facts in this case show that the plaintiff in the suit had filed an application for temporary injunction and appointment of Receiver and that was pending for some time. Thereafter, talks were in progress for arriving at a settlement out of court. When such talks failed, the appellant filed an application under section 8 of the Act before filing the written statement or filing any other

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statement which could be considered to be a submission of a statement on the substance of the dispute. The High Court was not therefore justified in rejecting the application on the ground of delay. ”

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While answering Question (iv) in the said case, the Hon'ble Supreme Court, at paragraphs 20 to 24 of the judgment, observed thus:

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“ 20. The nature and scope of issues arising for consideration in an application under section 11 of the Act for appointment of arbitrators, are far narrower than those arising in an application under section 8 of the Act, seeking reference of the parties to a suit to arbitration. While considering an application under section 11 of the Act, the Chief Justice or his designate would not embark upon an examination of the issue of arbitrability' or appropriateness of adjudication by a private forum, once he finds that there was an arbitration agreement between or among the parties, and would leave the issue of arbitrability for the decision of the arbitral Tribunal. If the arbitrator wrongly holds that the dispute is arbitrable, the aggrieved party will have to challenge the award by filing an application under section 34 of the Act, relying upon sub-section 2(b)(i) of that section. But where the issue of arbitrability' arises in the context of an application under section 8 of the Act in a pending suit, all aspects of

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arbitrability have to be decided by the court seized of the suit, and cannot be left to the decision of the Arbitrator.

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Even if there is an arbitration agreement between the parties, and even if the dispute is covered by the arbitration agreement, the court where the civil suit is pending, will refuse an application under Section 8 of the Act, to refer the parties to arbitration, if the subject matter of the suit is capable of adjudication only by a public forum or the relief claimed can only be granted by a special court or Tribunal.

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21. The term `arbitrability' has different meanings in different contexts.

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The three facets of arbitrability, relating to the jurisdiction of the arbitral tribunal, are as under : (i) whether the disputes are capable of adjudication and settlement by arbitration? That is, whether the disputes, having regard to their nature, could be resolved by a private forum chosen by the parties (the arbitral tribunal) or whether they would exclusively fall within the domain of public fora (courts). (ii) Whether the disputes are covered by the arbitration agreement? That is, whether the disputes are enumerated or described in the arbitration agreement as matters to be decided by arbitration or whether the disputes fall under the `excepted matters' excluded from the purview of the arbitration agreement. (iii) Whether the parties have referred the disputes to arbitration? That is, whether the

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disputes fall under the scope of the submission to the arbitral tribunal, or whether they do not arise out of the statement of claim and the counter claim filed before the arbitral tribunal. A dispute, even if it is capable of being decided by arbitration and falling within the scope of arbitration agreement, will not be `arbitrable' if it is not enumerated in the joint list of disputes referred to arbitration, or in the absence of such joint list of disputes, does not form part of the disputes raised in the pleadings before the arbitral tribunal.

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22. Arbitral tribunals are private fora chosen voluntarily by the parties to the dispute, to adjudicate their disputes in place of courts and tribunals which are public fora constituted under the laws of the country. Every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court, is in principle capable of being adjudicated and resolved by arbitration unless the jurisdiction of arbitral tribunals is excluded either expressly or by necessary implication. Adjudication of certain categories of proceedings are reserved by the Legislature exclusively for public fora as a matter of public policy. Certain other categories of cases, though not expressly reserved for adjudication by a public fora (courts and Tribunals), may by necessary implication stand excluded from the purview of private fora. Consequently, where the cause/dispute is inarbitrable, the court where a suit is pending, will refuse to refer the parties to arbitration, under section 8 of the Act, even if

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the parties might have agreed upon arbitration as the forum for settlement of such disputes. The well recognized examples of non-arbitrable disputes are : (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding up matters;(v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

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23. It may be noticed that the cases referred to above relate to actions in rem. A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. Actions in personam refer to actions determining the rights and interests of the parties themselves in the subject matter of the case, whereas actions in rem refer to actions determining the title to property and the rights of the parties, not merely among themselves but also against all persons at any time claiming an interest in that property.

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Correspondingly, judgment in personam refers to a judgment against a person as distinguished from a

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judgment against a thing, right or status and Judgment in rem refers to a judgment that determines the status or condition of property which operates directly on the property itself. (Vide : Black's Law Dictionary). Generally and traditionally all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to sub-ordinate rights in personam arising from rights in rem have always been considered to be arbitrable.

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24. The Act does not specifically exclude any category of disputes as being not arbitrable. Sections 34(2)(b) and 48(2) of the Act however make it clear that an arbitral award will be set aside if the court finds that "the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force. ”

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It is also useful to refer to the judgment of the Hon'ble Supreme Court of the case of SUKANYA HOLDINGS (P) LTD. V. JAYESH H. PANDYA AND ANOTHER reported in (2003)5 SCC 531 wherein, at paragraphs 12 and 13 of the judgment, it is held thus:

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” 12. For interpretation of Section 8, Section 5 would have no bearing because it only contemplates that in the matters governed by Part-I of the Act, Judicial authority shall not intervene except where so provided in the Act. Except Section 8, there is no other provision in the Act that in a pending suit, the dispute is required to be referred to the arbitrator. Further, the matter is not required to be referred to the arbitral Tribunal, if (1) the parties to the arbitration agreement have not filed any such application for referring the dispute to the arbitrator; (2) in a pending suit, such application is not filed before submitting first statement on the substance of the dispute; or (3) such application is not accompanied by the original arbitration agreement or duly certified copy thereof. This would, therefore, mean that Arbitration Act does not oust the jurisdiction of the Civil Court to decide the dispute in a case where parties to the Arbitration Agreement do not take appropriate steps as contemplated under sub- sections (1) & (2) of Section 8 of the Act.

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13. Secondly, there is no provision in the Act that when the subject matter of the suit includes subject matter of the arbitration agreement as well as other disputes, the matter is required to be referred to arbitration. There is also no provision for splitting the cause or parties and referring the subject matter of the suit to the arbitrators. ”

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12. Further at paragraphs 15 and 16, it is observed thus:

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” 15. The relevant language used in Section 8 is "in a matter which is the subject matter of an arbitration agreement", Court is required to refer the parties to arbitration. Therefore, the suit should be in respect of 'a matter' which the parties have agreed to refer and which comes within the ambit of arbitration agreement. Where, however, a suit is commenced - "as to a matter" which lies outside the arbitration agreement and is also between some of the parties who are not parties to the arbitration agreement, there is no question of application of Section 8. The words 'a matter' indicates entire subject matter of the suit should be subject to arbitration agreement.

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16. The next question which requires consideration is even if there is no provision for partly referring the dispute to arbitration, whether such a course is possible under Section 8 of the Act? In our view, it would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action that is to say the subject matter of the suit or in some cases bifurcation of the suit between parties who are parties to the arbitration agreement and others is possible. This would be laying down a totally new procedure not contemplated under the Act. If bifurcation of the subject matter of a suit was contemplated, the legislature would have used appropriate language to permit such a course. Since there is no such indication in the language, it follows that

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bifurcation of the subject matter of an action brought before a judicial authority is not allowed.”

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The aforementioned dictum was taken note of and affirmed by the Three Judges Bench of the Hon'ble Supreme Court in the case of VIDYA DROLIA (supra). At paragraph 23 of the judgment, it is observed thus:

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“23. Analysing provisions of Order XXXIV of the Code of Civil Procedure, 1908, Booz Allen & Hamilton Inc. holds that this Order not only relates to execution of a decree, it provides for preliminary and final decrees to satisfy the substantive rights of mortgagees with reference to their mortgage security. The provisions of Transfer of Property Act read with the Code relating to mortgage suits makes it clear that all persons having interest either in the mortgage security or in the right of redemption have to be joined as parties whether they are parties to the mortgage or not. The object of the provisions is to avoid multiplicity of suits/proceedings and to enable all the interested persons to raise their defences and claims, which are to be taken note of while dealing with the claim in the mortgage suit. By passing a preliminary decree or final decree, the court adjudicates, adjusts and safeguards the interests of not only the mortgager or mortgagee but also puisne/mesne mortgagees, persons entitled to the equity of redemption,

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persons having an interest in the mortgaged property, auction-purchasers and persons in possession, which an arbitral tribunal cannot do. Therefore, a suit for foreclosure or redemption of mortgage property can be dealt with by a public forum and not by a private forum. ”

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Following the law declared by the Hon'ble Supreme

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Court in the aforementioned cases, we are of the considered view that any dispute for foreclosure or redemption of mortgage property has to be dealt with by a Civil Court as the same is of ‘civil nature’ following the procedure contemplated under Code of Civil Procedure in a public forum, i.e. to be resolved by a court of law as the dispute is of right in rem and not right in personam, which has to be resolved in a Arbitration proceedings. In the light of the discussions made above, the entire dispute between the parties in the instant case revolves around the registered mortgage deed dated 07^th October, 2008 and therefore, we find “patent illegality” in the impugned judgment passed by the trial Court and the arbitral award. In view of the law declared by the Hon'ble Supreme Court in the case of MMTC LTD. v. VEDANTA LIMITED reported in (2019)4 SCC 163, we are also conscious of the fact that the interference under Section 37

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of the Act is very limited, however, entertaining the arbitration proceedings by the learned Arbitrator in connection with the dispute relating to mortgage, amounts to violation of the law declared by the Hon'ble Supreme Court in the case of BOOZ ALLEN AND HAMILTON INC (supra) and in the case of VIDYA DROLIA (supra) and therefore, we find substance in the arguments advanced by the learned counsel appearing for the appellant to interfere with the impugned judgment passed by the trial Court under Section 34 of the Act.

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Though the learned counsel appearing for the parties have urged many grounds in support of their case, however, for the foregoing reasons, since the impugned judgment is contrary to the law declared by the Hon'ble Supreme Court, we do not venture to delve upon other grounds urged by the learned counsel appearing for the parties.

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In the result, we pass the following:

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O R D E R

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i) Appeal is allowed;

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ii) Impugned judgment dated 11^th February, 2019 passed in A.S. No.27 of 2011 on the file of the XX Additional City Civil and Sessions Judge, Bangalore as well as the Arbitral Award dated 06^th March, 2011 passed in ARB/DM/05/2009 on the file of the Arbitral Tribunal at Bangalore are set aside;

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iii) Liberty is reserved to the parties to agitate their rights in accordance with law;

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iv) No order as to costs.

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Sd/JUDGE

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Sd/JUDGE

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lnn

Sri B S Jayakumara Swamy v. M/S Rajesh Exports Limited

Case brief

What is this about?

What did the court decide?

Sri B S Jayakumara Swamy v. M/S Rajesh Exports Limited

Case brief

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What the court decided

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