India – Unilateral Opt-Out Clauses Cannot Amount To A Valid Arbitration Agreement As It Lacks Mutuality.

Order dated: 24 November 2021

Shri Chand Construction and Apartment Pvt. Ltd. (Shri Chand Construction) had availed financial facility from Tata Capital Housing Finance Ltd. (Tata Finance) for purchase of a property. This loan was secured, and original documents of the property were handed over to Tata Finance. Upon repayment of the entire financial facility, Shri Chand Construction sought the return of the original documents to resell the property. As Tata Finance had misplaced the original documents, the resale was delayed, and the consideration allegedly reduced.

Resultantly, Shri Chand Construction filed a suit seeking compensation from Tata Finance for loss of original property documents. Tata Finance challenged this on the ground that the only remedy available to Shri Chand Construction was arbitration and it cannot approach the court seeking damages. The arbitration clause in the loan agreement also stated that in the event Tata Finance comes under the purview of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) or the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act) (which would enable Tata Finance to proceed and recover dues from its borrowers in an expedited manner), then arbitration provisions contained shall, at the option of Tata Finance, cease to have any effect. However, no such right was given to Shri Chand Construction, which was bound to arbitrate its claims. Tata Finance’s application before the trial court to refer the matter for arbitration was rejected and this decision of the trial judge was then challenged by Tata Finance before the HC.

The Delhi HC held that an arbitration agreement that confers unequal power on one party to unilaterally abandon the arbitration proceedings, would be invalid in law, as such an agreement would lack ‘mutuality’, which is an essential feature of an arbitration agreement. HC further held that an arbitration agreement which provides for arbitration of the claims of one party and provides for a remedy of court for the claim of the other party would also be invalid in law as the same would not only result in splitting of the claims and cause of action but also in the multiplicity of proceedings and conflicting decisions on the same cause of action. Therefore, the Delhi HC upheld the decision of the trial court and dismissed the appeal.