Mortgage: Courts or Arbitration?

Financial institutions can heave a sigh of relief at the Bombay HC's recent judgement, which clarifies that under Section 9 of the Arbitration and Conciliation Act, 1996, interim relief can be sought with respect to mortgaged properties

After almost 15 years of enactment of the Arbitration and Conciliation Act, 1996 (Act), the Supreme Court had passed a landmark judgement in the case of Booz Allen and Hamilton Inc. vs. SBI Home Finance Ltd. and others (2011) 5 SCC 532 ['Booz Allen'].

The SC held that enforcement of a mortgage being the enforcement of a right in rem, will have to be decided by courts and not by arbitral tribunals. Post Booz Allen, there were apparent differences of opinion in the legal industry on the issue as to whether one can seek interim relief with respect to mortgaged properties under Section 9 of the Act or not, where enforcement of such mortgage is not per se arbitrable.

TATA Capital

Clearing this thick muddle and as a major relief to financial institutions, the Bombay High Court recently (February 21, 2013), vide its judgement in the TATA Capital Financial Services Limited vs. M/s. Deccan Chronicle Holdings Limited ['TATA Capital'] held that interim relief under Section 9 of the Act can be granted by the court to an applicant with respect to mortgaged properties; however, not in the capacity as a mortgagor.

Booz Allen - The Background

In an application filed under Section 8 of the Act in a mortgage suit, the Bombay High Court refused to refer the matter to arbitration and when the same was challenged in appeal before the Supreme Court by way of a special leave petition, the key issue that arose for the Court's consideration was Whether the subject matter of the suit is 'arbitrable' and is capable of being adjudicated by a private forum (arbitral tribunal)?

The Apex Court answered in the negative and consequently, upheld the Bombay High Court's decision.

The Court upheld that "An agreement to sell or an agreement to mortgage does not involve any transfer of right in rem but creates only a personal obligation. Therefore, if specific performance is sought either in regard to an agreement to sell or an agreement to mortgage, the claim for specific performance will be arbitrable. On the other hand, a mortgage is a transfer of a right in rem. A mortgage suit for sale of the mortgaged property is an action in rem, for enforcement of a right in rem. A suit on mortgage is not a mere suit for money. A suit for enforcement of a mortgage being the enforcement of a right in rem, will have to be decided by courts of law and not by arbitral tribunals."

Analysis

The legal issues considered by the Supreme Court and the Bombay High Court in Booz Allen & TATA Capital respectively can by and large be summarised under the following heads:

(i) Arbitrability;

(ii) Aspects of arbitrability in Application under Section 9 of the Act; and

(iii) Interim relief under Section 9 of the Act & Order 38 Rule 5 of CPC

(i) Arbitrability

Interestingly, the Act does not specifically exclude any category of disputes as being not arbitrable unlike the English Arbitration Act, 1996 where Section 48 (5) (b) has an express prohibition relating to specific performance of contracts concerning immovable property. However, Sections 34(2)(b) and 48(2) of the Act 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."

Some of the 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.

The cases referred to above relate to actions in rem. Though it is not a rigid or inflexible rule, 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. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.

Enforcement of mortgage rights in a property being an action in rem cannot be decided by arbitral tribunals. Further, as it is upheld by the Supreme Court in Booz Allen, even if some of the issues or questions in a mortgage suit are arbitrable or could be decided by a private forum, the issues in a mortgage suit cannot be divided.

(ii) Aspects of arbitrability in Application under Section 9 of the Act

As per Section 16 of the Act, the power to rule on its jurisdiction lies with the arbitral tribunal itself, including ruling on any objections with respect to the existence or validity of the arbitration agreement. However, as an exception to this rule, the Supreme Court and various High Courts have held that when in applications filed under Sections 8, 9 and 11 of the Act, the issue of arbitrabilityarises, all aspects of arbitrability have to be decided by the court, and cannot be left to the decision of the arbitrator.

Court can grant interim measures under sub-sections 2(b), (d) and (e) even if the property or things are not subject matter of the dispute in arbitration

With respect to the issue of arbitrability in an application under Section 9 of the Act, the Apex Supreme Court in SBP & Co., vs. Patel Engineering Ltd. and another (2005) 8 SCC 618[Para 18] has held that the court has necessarily to decide whether it has jurisdiction, whether there is an arbitration agreement which is valid in law, and whether the dispute sought to be raised is covered by that agreement. The Apex Court observed that Section 9 of the Act clearly mandates that once approached in that behalf, "the Court shall have the same power for making orders as it has for the purpose of and in relation to any proceeding before it."

However in the case of TATA Capital, since there was no statement of claim filed at that stage, the Bombay High Court without getting into the issue of arbitrability took a view that, 'while hearing an application under Section 9 of the Act, the court cannot reject the application for interim measures on the ground that the Petitioner may ultimately apply for enforcement of mortgage, which would be beyond the jurisdiction of the arbitral tribunal'.

(iii) Interim relief under Section 9 of the Act & Order 38 Rule 5 of CPC

On reading of Section 9 of the Act, it is clear that the court can grant interim measures under sub-sections 2(b), (d) and (e) even if the property or things are not subject matter of the dispute in arbitration. Attachment before Judgement as provided under Order 38 Rule 5 of Code of Civil Procedure, 1908 ('CPC') is conditioned by two requirements, the first being with regard to the conduct of the defendant, where he is about to alienate his property or to remove it from the jurisdiction of the court and the second, the intention of the defendant to obstruct or delay the execution of a decree that may be passed against him.

Though it is often contended that the powers under Section 9 of the Act are wider than the powers of the court under Order 38 Rule 5; the Division Bench of the Bombay High Court in the case of Nimbus Communications Ltd. & anr. Vs. Board of Control for Cricket in India & anr. 2012(5) Bom. C.R.114 has held that the principles laid down in the CPC for grant of interlocutory remedies must guide the court when it determines the application under Section 9 of the Act and underlying basis of Order 38 Rule 5 thereof has to be borne in mind while deciding applications under Section 9(ii)(b) of the Act.

Take Away

The decision of the Bombay High Court in TATA Capital has major significance for financial institutions since they can seek relief with respect to mortgaged properties under Section 9 of the Act even prior to arbitral proceedings or filing of mortgage suit, though not in the capacity as a mortgagor.

Disclaimer - The views expressed in this article are the personal views of the authors and are purely informative in nature.