Case: Booz Allen and Hamilton Inc Vs. SBI Home Finance Ltd. &amp; Others

2. Capstone Investment Co. Pvt. Ltd. (second respondent herein, for short "Capstone") and Real Value Appliances Pvt. Ltd. (respondent No.3 herein, for short "RV Appliances") are the owners of flat No.9A and 9B respectively situated at "Brighton", Napien Sea Road, Mumbai. Capstone and RV Appliances had borrowed loans from SBI Home Finance Ltd., (the first respondent herein, for short "SBI") under two loan agreements dated 3.12.1994 by securing the said two flats in favour of SBI.3. Under two leave and licence agreements dated 5.4.1996, Capstone and RV Appliances permitted the appellant to use their respective flats, for the term 1.9.1996 to 31.8.1999. Each licence agreement was signed, in addition to the licensor and licensee, by the other flat owner (that is RV Appliances in respect of agreement relating to 9A and Capstone in respect of agreement relating to 9B) and SBI as confirming parties 1 and 2.4. On the same day (5.4.1996) a tripartite deposit agreement was entered among RV Appliances and Capstone as the first party, appellant as the second party and SBI as the third party. Under the said agreement, the appellant paid a refundable security deposit of Rs.6.5 crores to Capstone and RV Appliances (at the rate of Rs.3.25 crores for each flat). Clause (E) of the said agreement confirmed that the appellant made the said deposit and Capstone and RV Appliances received the said deposit on the basis of the terms and conditions recorded in the two leave and licence agreements and the deposit agreement; and that the three agreements together formed a single integral transaction, inseparable, co-extensive and co-terminus in character. Out of the said deposit of Rs.6.5 crores, a sum of Rs.5.5 crores was directly paid to SBI on the instructions of Capstone and RV Appliances towards repayment of the loan taken by Capstone and Real Value and the balance of Rs.1 crore accounted in the manner indicated therein. As a consequence, the loan due by Capstone to SBI in regard to flat No.9A was cleared, but the loan taken by RV Appliances remained due and outstanding. Capstone however became a guarantor for repayment of the amount due by RV Appliances and flat No.9A was secured in favour of SBI and a charge was created in the shares relating to flat No.9A belonging to Capstone in favour of SBI, as security for repayment of the loan by R V Appliances. We extract below the relevant portion of para 5A of the agreementnotwithstanding the repayment of the dues of Capstone Investment Co.Pvt.Ltd., the share Nos.4001 to 4250 of the Society and Flat No.9A shall continue to be available to the Party of the Third Part as security of the remaining dues of Real Value Appliances Ltd., and in this connection it is agreed that upon liquidating the dues of Capstone Investment Co.Pvt.Ltd., and in order to make available the said shares Nos.4001 to 4250 and Flat No.9A as security, Capstone Investment Co.Pvt.Ltd. shall become a Guarantor for repayment of dues of Real Value Appliances Pvt.Ltd. The Parties of the Third Part are confirming that it has no objection to the Party of the Second Part, its employee or officer occupying the Flats and that as long as the balance of the principal amount and interest due thereon is paid by the Parties of the First Part (or as per arrangement hereafter recorded) by the Party of the Second Part to Party of the Third Part, the Parties of the Third Part shall not enforce the mortgage and will permit the Party of the Second Part, its employee or officer to occupy the said(3) of the Deposit agreement gave an option to the appellant who opted to continue the licence in respect of the two flats for a further period of two years beyond 31.8.1999, by paying an additional deposit of Rs.2 crores (at the rate of Rs.1 crore for each flat).Clause (11) enabled the appellant to continue to use and occupy the flats so long as the amounts paid by it as security deposit remained unpaid.Clause (8) gave the option to the appellant to pay the amount due to the SBI on behalf of the borrowers to safeguard its interest. Relevant portion of para 8 is extractedany default is made by the Parties of the First Part in paying any sum(s) due from time to time by them to the Parties of the Third Part under the loan facility, the Party of the Second Part shall, to safeguard its interest in retaining the right to use and occupy the said Flats, have an option to pay the Parties of the Third Part the sum(s) so becoming due and remaining unpaid by the Parties of the First Part, on their(9) and (10) provide that at the end of the licence period, Capstone and R V Appliances shall jointly and severally be liable to refund the deposit amount along with interest thereon from the date of expiry of the licence to date of actual paymentClause (16) of the deposit agreement provided for arbitration and is extractedcase of any dispute with respect to creation and enforcement of charge over the said shares and the said Flats and realization of sales proceeds therefrom, application of sales proceeds towards discharge of liability of the Parties of the First Part to the parties of the Second Part and exercise of the right of the Party of the Second Part to continue to occupy the said Flats until entire dues as recorded in Clause 9 and 10 hereinabove are realized by the party of the Second Part, shall be referred to an Arbitrator who shall be retired Judge of Mumbai High Court and if no such Judge is ready and willing to enter upon the reference, any Senior Counsel practicing in Mumbai High Court shall be appointed as the Sole Arbitrator. The Arbitrator will be required to cite reasons for giving the award. The arbitration proceedings shall be governed by the Arbitration and Conciliation Ordinance 1996 or the enactment, re-enactment or amendment thereof. The arbitration proceedings shall be held at Mumbai.In or about July 1997 a reference was made by RV Appliances to the Board of Industrial and Financial Reconstruction (BIFR for short) under the Sick Industrial Companies (Special Provisions) Act, 1985 and in pursuance of it, flat 9B was taken over by the official liquidator.6. By letter dated 4.8.1999, appellant informed Capstone and RV Appliances that it was not interested in exercising the option to renew the licences on expiry of the leave and licence agreements on 31.8.1999 and called upon the licensors to refund the security deposit of Rs.6.5 crores, assuring that it would vacate and deliver up the licensed flats on receipt of the deposit amount. The appellant informed SBI and BIFR about it by endorsing copies of the said letters to them. As there was no confirmation from Capstone and RV Appliances that they would refund the sum of Rs.6.5 crores, the appellant wrote a further letter dated 26.8.1999 stating that it would continue to occupy the flats if the security deposit was not refunded.7. As the loan amount due by RV Appliances was not repaid, SBI filed a mortgage suit (Suit No.6397/1999) in the High Court of Bombay on 28.10.1999 against Capstone (first defendant), appellant (second defendant), and RV Appliances (defendant No.3) in regard to the mortgaged property (flat No.9A) for the followingfor a declaration that the 1st defendant as mortgagor was due in a sum of Rs.8,46,10,731/- with further interest on the principal sum at the rate of Rs.16.5% per annum and additional interest for delayed payment at the rate of 2% per month from 1st September, 1999 till payment or realization;(b) for a declaration that the amount and interest mentioned in prayer (a) above is secured in favour of the plaintiffs by a valid and subsisting mortgage of flat No.9A and three garages (suit premises);(c) for a direction to the first defendant to pay to the plaintiff the amount and interest in prayer (a) by such date as may be fixed by the Court for redemption of the mortgage and in the event of the first defendant failing to make payment by that date, the suit premises be sold by and under the orders and directions of the Court in enforcement and realization of the mortgage thereon and the net realization thereof be paid over to the plaintiff in or towards satisfaction of its claim herein;(d) for a personal decree against the first defendant to the extent of any deficiency in sale realization;(e) that the second defendant be ordered to vacate the suit premises and hand over possession thereof to the plaintiff to enable the plaintiff effectively to enforce and realize its security thereon.On a notice of motion taken out by SBI seeking interim relief, the High Court issued the following order on 25.11.1999Defendant No.2 shall continue to occupy Flat No.9A and garages Nos. 45 to 47 situate at Brighton, 68D, Napean Sea Road, Mumbai but shall not create any third party right or interest of any nature whatsoever in the said flat nor shall hand over possession of the said flat to defendant No.1 or 3 till further order.Mr. Dharmadhikari, learned counsel for first defendant makes a statement that till further orders, the first defendant shall not create any third party interest in the said flat No.9A and garages Nos.45 to 47 nor shall alienate, dispose of or transfer the said property till further orders. Statement of Mr. Dharmadhikari is15.12.1999 the appellant filed a detailed reply to the said notice of motion. It inter alia contended that SBI had a contractual obligation towards the appellant as it had agreed for the continuance of appellants occupation till refund of the deposit. Capstone also contested the application, denying the existence of any mortgage or charge over flat No.9A.9. The appellant however did not file its written statement in the suit. The appellant claims that settlement talks were being held for some time but did not fructify into any settlement. Therefore, on 10.10.2001, the appellant took out a notice of motion praying that the parties to the suit be referred to arbitration as provided in clause 16 of the deposit agreement dated 5.4.1996 and consequently the suit be dismissed. The said application was resisted by the SBI.10. A learned single Judge of the High Court by impugned order dated 7.3.2002 dismissed the application holding asClause 16 of the deposit agreement (arbitration agreement) did not cover the dispute which is the subject matter of the claim by SBI against its borrowers (Capstone and RV Appliances) and therefore, it was not open to the appellant to request the court to refer the parties to arbitration.(b) The detailed counter affidavit dated 15.12.1999 filed by the appellant, in regard to the notice of motion for temporary injunction, amounted to submission of the first statement on the substance of the dispute, before filing the application under section 8 of the Act and therefore the appellant lost the right to seek reference to arbitration.(c) The suit was filed on 28.10.1999. The appellant filed the counter affidavit opposing the application for temporary injunction on 15.12.1999. The application under section 8 of the Act was filed on 10.10.2001 nearly 20 months thereafter, during which period the appellant had subjected itself to the jurisdiction of the High Court. In view of the inordinate delay, the appellant was not entitled to the relief under section 8 of thesaid order is challenged in this appeal by special leave. This court while granting leave on 28.8.2002 stayed the further proceedings in the suit.

Court's reasoning:
14. In this case, there is no dispute that all the parties to the suit are parties to an agreement which contains the provision for settlement of disputes by arbitration. Clause (16) which provides for arbitration provides for settlement of the following disputes by arbitration : (a) disputes with respect to creation of charge over the shares and flats; (b) disputes with respect to enforcement of the charge over the shares and flats and realization of sale proceeds therefrom; (c) application of the sale proceeds towards discharge of liability of Capstone and RV Appliances to the appellant; and (e) disputes relating to exercise of right of the appellant to continue to occupy the flats until the entire dues as stated in clauses 9 and 10 of the deposit agreement are realised by the appellant.15. The suit has been filed by SBI to enforce the mortgage to recover the amounts due to it. In that context, SBI has also sought delivery of vacant possession. The enforcement of the charge/mortgage over the flat, realisation of sale proceeds therefrom and the right of the appellant to stay in possession till the entire deposit is repaid, are all matters which are specifically mentioned in clause 16 as matters to be settled by arbitration. Therefore, the subject matter of the suit falls within the scope of the arbitration agreement.The appellant filed a detailed affidavit opposing the application for interim injunction on 15.12.1999. Thereafter the appellant filed the application under section 8 of the Act on 12.10.2001. On the date of filing of the application under section 8, the appellant had not filed the written statement. Section 8 of the Act provides that a judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration. The High Court has held that filing a detailed counter affidavit by a defendant setting out its case, in reply to an application for temporary injunction, should be considered to be the submission of the first statement on the substance of the dispute; and that the application under section 8 of the Act having been filed subsequent to filing of such first statement on the substance of the dispute, the appellants prayer for referring the parties to arbitration cannot be accepted. The question therefore is whether filing a counter to an application for temporary injunction can be considered as submitting the first statement on the substance of the dispute.17. Not only filing of the written statement in a suit, but filing of any statement, application, affidavit filed by a defendant prior to the filing of the written statement will be construed as `submission of a statement on the substance of the dispute, if by filing such statement/application/affidavit, the defendant shows his intention to submit himself to the jurisdiction of the court and waive his right to seek reference to arbitration. But filing of a reply by a defendant, to an application for temporary injunction/attachment before judgment/appointment of Receiver, cannot be considered as submission of a statement on the substance of the dispute, as that is done to avoid an interim order being made against him. In Rashtriya Ispat Nigam Ltd vs. Verma Transport Company - 2006 (7) SCC 275 , this Court held that the expression first statement on the substance of the dispute contained in Section 8(1) of the Act is different from the expression written statement, and refers to a submission of the party making the application under section 8 of the Act, to the jurisdiction of the judicial authority; and what should be decided by the court is whether the party seeking reference to arbitration has waived his right to invoke the arbitration clause. This Court then proceeded to consider whether contesting an application for temporary injunction by filing a counter, would amount to subjecting oneself to the jurisdiction of the court.In this case, the counter affidavit dated 15.12.1999, filed by the appellant in reply to the notice of motion (seeking appointment of a receiver and grant of a temporary injunction) clearly stated that the reply affidavit was being filed for the limited purpose of opposing the interim relief. Even in the absence of such a disclaimer, filing a detailed objection to an application for interim relief cannot be considered to be submission of a statement on the substance of the dispute resulting in submitting oneself to the jurisdiction of the court.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 and subjected himself to the jurisdiction of the court, depends upon the conduct of such party in the suit. 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 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.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 arbitrability have to be decided by the court seized of the suit, and cannot be left to the decision of the Arbitrator. 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.A decree for sale of a mortgaged property as in the case of a decree for order of winding up, requires the court to protect the interests of persons other than the parties to the suit/petition and empowers the court to entertain and adjudicate upon rights and liabilities of third parties (other than those who are parties to the arbitration agreement). Therefore, a suit for sale, foreclosure or redemption of a mortgaged property, should only be tried by a public forum, and not by an arbitral tribunal. Consequently, it follows that the court where the mortgage suit is pending, should not refer the parties to arbitration.Having regard to our finding on question (iv) it has to be held that the suit being one for enforcement of a mortgage by sale, it should be tried by the court and not by an arbitral tribunal. Therefore we uphold the dismissal of the application under section 8 of the Act, though for different reasons.