Section 21 Notice Mandatory Even If The Arbitration Clause Arbitration Clause Envisages Unilateral Appointment Of A Sole Arbitrator In Violation Of Section 12(5) Of The Arbitration Act
In the matter of Amit Guglani & Anr. V. L and T Housing Finance ltd. Through Managing Director & Anr. [Arb.P. 1317/2022 and I.A. No. 19286/2022], dispute arose between the parties to a Loan Agreement wherein the Respondent disbursed the loan to the Petitioners. The dispute was primarily in relation to the Basic Prime Lending Rate (BPLR) which was increased by the Respondent after execution of the Loan Agreement. The Petitioners continuously protested through various communications, however, with no avail. The Respondent, instead of addressing the issues raised by the Petitioners, sent a legal notice followed by a notice under Section 13(2) of SARFAESI Act, stating therein that owing to defaults in the payment of loan instalments, the loan account of the Petitioners had been classified as Non-Performing Asset and 60 days’ time was given to the Petitioners to pay the entire outstanding amounts.
The Petitioners invoked arbitration clause by directly approaching the court under Section 11(6) of the Arbitration and Conciliation Act, 1996 (the “Act”). As per the Petitioners, they approached the Court since the Arbitration Clause envisages unilateral appointment of a sole Arbitrator by lender/Respondent No.1, which cannot be sustained in law, being in violation of Section 12(5) of the Act and the judgment of the Supreme Court in Perkins Eastman Architects DPC And Another v. HSCC (India) Limited, (2020) 20 SCC 760. As per the Petitioners, no purpose would have been achieved by sending a notice under Section 21 of the Act as the authority under the said clause suffers from a disability to appoint the Arbitrator. Petitioners also filed an IA along with the petition under section 11(6) of the Act seeking exemption from serving an invocation notice under Section 21 of the Act on the ground stated above.
Out of the two preliminary objections raised by the Respondent, one was that mandatory notice of invocation under Section 21 of the Act has not been given by the Petitioners and in the absence of mandatory notice under Section 21 of the Act, the petition deserves to be dismissed.
The Court, after hearing both the sides on the said issue, disapproved all of the arguments raised by the Petitioners. The Court firstly reasoned that there are certain conditions that Section 11(6) of the Act comes into play when the contingencies stipulated therein occur which includes failure of a party to act as required under the procedure agreed by the parties and, it is only when the agreed procedure does not lead to appointment of Arbitrator, on account of failure on the part of either party, that jurisdiction of a Court can be invoked under Section 11(6) of the Act. Therefore, invocation of the Court’s jurisdiction under Section 11(6) presupposes initiation of procedure agreed upon by the parties under the Arbitration Clause. The Court further opined that Section 21 comes into play as a 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.
The Court made reference to several judgments of the Delhi High Court including Alupro Building Systems Pvt. Ltd. v. Ozone Overseas Pvt. Ltd., (2017) SCC OnLine Del 7228, Rahul Jain and Others v. Atul Jain and Others, 2022 SCC OnLine Del 3860 and Anil Goel v. Satish Goel, 2022 SCC OnLine Del 3774. The Court affirmed that aggrieved party has to invoke arbitration and at the very least, it has to refer to the clause in the contract which envisages reference of the dispute to arbitration. Merely sending a notice, setting out the disputes between the parties and informing the addressee that civil and criminal legal remedies would be availed in the event of failure, cannot constitute a notice invoking arbitration.” The Court further referred to the judgment in Shriram Transport Finance Company Limited v. Narender Singh, 2022 SCC OnLine Del 3412.
Applying the law as laid down by the Hon’ble High Court in the other judgments, the Court concluded that it cannot be argued by Petitioners that notice under Section 21 of the Act is not mandatory. The argument of the Petitioners that since the Arbitration Clause envisages unilateral appointment, the exercise of sending an invocation notice was futile cannot be sustained in law. The court further referred to the judgment in D.P. Construction v. Vishvaraj Environment Pvt. Ltd., 2022 SCC OnLine Bom 1410 wherein it was held that unless there is a request by a party that the dispute is to be referred to arbitration, merely stating the claims and disputes in the notice would not suffice.
The Court, in the light of the judgments, therefore, dismissed the petition under section 11(6) of the Act.
