All disputes relating to rights in personam are considered arbitrable and those relating to rights in rem are considered non-arbitrable.

[Case Brief] Booz Allen & Hamilton Inc. v/s SBI Home Finance Ltd. & Ors

Case name Booz Allen & Hamilton Inc. v/s SBI Home Finance Ltd. & Ors
Case number Civil Appeal Number 5440 of 2002
Court Supreme Court of India
Bench Justice R.V.Raveendran and Justice J.M. Panchal
Author of the judgment Justice R.V.Raveendran
Decided on  April 15, 2011
Relevant Act/Sections Arbitration and Conciliation Act, 1996- Section 8
Author of the case brief Lavanya Gupta ([email protected])

 

Brief Facts and Procedural History:

Capstone Investments Company Private Limited (“Capstone”) and Real Value Appliances Private Limited (“RV”) had borrowed loans from SBI Home Finance Limited (“SBI”) in respect of two flats 9A and 9B. The two flats were licensed to Booz Allen Hamilton from September 1, 1996 to August 31, 1999. Additionally, a tripartite agreement was entered among RV and Capstone as the first party, Booz Allen as second party and SBI as third party. As per the tripartite agreement, Booz Allen made a refundable security deposit of INR 6,50,00,000/- to the first party as per terms and conditions of the leave and license agreement. Out of the said INR 6,50,00,000/-, the first party paid INR 5,50,00,000/- towards repayment of their loan which cleared Capstone’s loan towards SBI, however RV’s loan remained due. Capstone became a guarantor for RV’s loan and flat 9A was charged as security for repayment.

In July 1997, a reference was made by RV to the Board of Industrial and Financial Reconstruction and in pursuance of the same 9B was taken over by the official liquidator. At the end of the term of the leave and license agreement, Booz Allen called upon Capstone and RV to refund the security deposit. However when the same was not refunded, Booz Allen wrote a  letter stating that it will continue to occupy the flats if the security deposit is not refunded. Moreover, as the loan amount due by RV was not paid, SBI filed a mortgage suit against Capstone, RV and Booz Allen in respect of 9A. Booz Allen took a motion that the parties be referred to arbitration as per the arbitration clause in the deposit agreement however, the same was refused by the learned single Judge of the Bombay High Court. It was against this order that the present special leave was filed before the Supreme Court.

Issues before the Court of Law:

1) Whether or not the subject matter of the suit fell within the arbitration clause of the deposit agreement?

2) Whether or not the subject matter of the suit is ‘arbitrable’?

Ratio of the Court:

  1. Yes. Clause 16 of the deposit agreement, which formed the arbitration clause provided for arbitration to settle disputes relating to creation of charge over shares and flats, enforcement of that charge thereof and realization of sale proceeds and application of the said proceeds towards discharge of liability of Capstone and RV. The mortgage suit was filed by SBI for recovery of amounts due and delivery of vacant possession of the mortgaged flat. All of the contested claims fall within the ambit of the arbitration clause of the tripartite deposit agreement.
  2. No. Arbitration is a private procedure which means that all matters cannot be readily resolved by a private forum for that would defeat certain objectives of the procedural law. Even if there exists an arbitration agreement between the parties and the dispute which arises is fairly covered by the arbitration agreement, it does not mean that the matter is ‘arbitrable’. Every civil or commercial dispute, either contractual or non-contractual, which can be decided by a court, can also be resolved by arbitration unless the jurisdiction of arbitral tribunals is excluded either expressly or by necessary implication through a legislation or judicial precedent. The learned judges in the present case went on to give examples of non-arbitrable disputes which inter alia include criminal disputes, matrimonial disputes and eviction and tenancy matters governed by special statutes. This is where the concept of actions in rem versus actions in personam arises which helps to decide the arbitrability of a particular dispute. As actions in rem affect the world at large and involve interest of the public, it is not apt for them to be decided by a private for a like an arbitral tribunal. Thus, generally and traditionally, all disputes relating to rights in personam are considered arbitrable and those relating to rights in rem are considered non-arbitrable. The Arbitration and Conciliation Act, 1996 does not demarcate matters as arbitrable or non-arbitrable but judicial decisions over the years have made the demarcation fairly clear. The present issue was covered by a special legislation and was for enforcement of mortgage by sale (action in rem), and thus it could not be decided through arbitration.

Decision Held:

The present case affected rights in rem created by the mortgage and so the dispute could not be decided by an arbitrator. Thus, the Supreme Court ruled in the Respondent’s favour and dismissed application made to it under Section 8 of the Act.

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