Booz Allen & Hamilton Inc. V/S Sbi Home Finance Ltd. & Ors

BOOZ ALLEN &

HAMILTON INC.
V/S SBI HOME
FINANCE LTD. &
ORS.
Introduction
 In a landmark judgment, Booz Allen and Hamilton Inc. v. SBI

Home Finance Ltd. & Ors. (judgment dt. April 15, 2011) a two-
judge bench of the Supreme Court ruled in an appeal by special
leave that a suit for enforcement of a mortgage by sale is non-
arbitrable.
 The scope of section 8 of the Arbitration and Conciliation Act,
1996 was under consideration in this SLP.
FACTS
 Capstone Investment and Real Value Investment, both Respondents in this case and owners of
flats, had borrowed loans from SBI Home Finance, another Respondent, under two loan
agreements by securing the two flats in favour of SBI. The Appellant was permitted to use the
above two flats under leave and license agreements signed by Appellant, the respective flat
owners as well as SBI as confirming parties.
 A tripartite deposit agreement was also entered into by Capstone and Real Value as one party,
Appellant as second party and SBI as third party. As per this agreement, Appellant was to pay the
flat owners a certain sum of money as refundable security deposit according to the terms and
conditions of the leave and license agreement and deposit agreement, and the three agreements
formed a single integral transaction. A part of the security deposit was paid directly to SBI towards
payment of loan taken by Capstone and Real Value. As a result, the loan due by Capstone was
cleared but the loan due by Real Value was outstanding. Capstone however became guarantor for
repayment of the amount due by Real Value and its flat was used as security.
FACTS
 Clause 16 of the deposit agreement provided for arbitration.

 In about July 1997, Real Value applied to the Board of Industrial and Financial Reconstruction
(BIFR) under the Sick Industrial Companies (Special Provisions) Act, and pursuance of it, the
second flat was taken over by the official liquidator.
 As the loan amount due by Real Value had not been paid, SBI filed a mortgage suit about two
years later before the Bombay High Court against Capstone, Real Value and the Appellant, in
regard to the mortgaged property, which was the flat owned by Capstone.
 SBI sought a declaration that Capstone as mortgagor owed a certain amount of money to SBI
which included the interest rate upto 16.5% on the principal amount and an interest for delayed
payment at the rate of 2% and if the same is not paid by the date fixed by the Court for
redemption, SBI had the right to redeem the amount due from proceeds of sale of the suit
property. It also sought a declaration that Appellant would vacate the property at the earliest.
FACTS
 A notice of motion was taken out by SBI seeking interim relief, the
HC issued an order stating that Capstone shall continue to occupy
the first flat and garages but shall not create third party right or
interest of ay nature whatsoever and neither shall he hand over
possession of the said flat to Real Value or SBI till further orders.
 Later, the appellant filed a detailed reply to the notice. It contended
that SBI had a contractual obligation towards the appellant, to which
Cpastone also contested the applicaton, denying the existence of any
mortgage or charge over the first flat.
 The appellant however did not file its written statement in the
suit. He claimed that the settlement talks were held but did not
result into any settlement. So, in 2001, the appellant furnished a
notice praying that the parties to the suit be referred to
arbitration as provided in Clause 16 of the deposit agreement
and consequently the suit be dismissed.
ISSUES BEFORE THE COURT OFLAW
 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’,
that is capable of being adjudicated by a private forum
(Arbitral Tribunal) and whether the HC ought to had referred
the parties to the suit to arbitration under Section 8 of the Act??
 3) Whether the applicant his first statement on the substance of
the dispute before filing the application under Section 8 of the
Act?
RATIO OF THE COURT
1. Yes. Clause 16 of the deposit agreement, which formed the arbitration clause provided for
arbitration to settle disputes with:
 relating to creation of charge over shares and flats
 disputes with respect to enforcement of the charge over the shares and flats and realization of sale
proceeds
 application of the sale proceeds towards discharge of liability of Capstone and RV appliances to the
appellant.
 Disputes relating to exercise of right of the appellant to continue to occuy the flats until the entire dues as
stated in Clause (9) and (10) of the deposit agreement are realised by the appellant.
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
Issue 2
2. Section 8 talks about “Power to refer parties to arbitration

where there is an arbitration agreement.- 1) 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 the first statement on the
substance of the dispute, refer the parties to arbitration.”
RATIO OF THE COURT
• 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.
Issue 3
 Section 8 does not prescribe any time-limit for filing an application and only states that the
application under Section 8 of the Act should be filed before the 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. A party who has willingly participates
in the proceedings in the suit and subjects himself to the jurisdiction of the court cannot subsequently
state that the parties should be referred to arbitration in view of the arbitration agreement. Whether a
party has waived his right to seek arbitration and subjected himself to the jurisdiction of the court,
depends on the conduct of such party in the suit.
 The facts in the case show that the plaintiff in the suit had filed an application for temporary
injunction and appointment of Receiver and that had been pending for a while. Thereafter while the
talks for settlement were in progress for arriving at settlement outside the 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 HC was therefore not justified in rejectig the application on the ground
of delay.
ANALYSIS
 The judgment in Booz Allen4 and the 246th Law Commission Report were referred to by Justice Sikri
on behalf of the Division Bench while discussing whether the present dispute was capable of
adjudication and settlement by arbitration. The order in Booz Allen held that only where the subject
matter of the dispute fell exclusively within the domain of courts, could the dispute said to be non-
arbitrable. In general, , a right in rem would not be arbitrable but a right in persona would be capable
of adjudication in private fora. The SC in Booz Allen and more recently in Vimal Kishor Shah5 have
outlined the following instances which would be outside the purview of arbitration:
 Disputes relating to rights and liabilities which give rise to or arise out of criminal offences;
 Matrimonial disputes;
 Guardianship matters;
 Insolvency and winding up;
 Testamentary matters;
 Eviction or tenancy matters; and
 Disputes inter se between trust, trustees, and beneficiaries.
HELD
1. The SC held that mere allegation of fraud simplicitor would not be a ground to nullify the
effect of an arbitration agreement between the parties. Only in those cases where the
courts, while dealing with Section 8 of the Act, find that there are very serious allegations
of fraud which make a clear case of criminal offence or where allegations of fraud are so
complicated that it becomes absolutely essential that such complex issues can be decided
only by a civil court on the appreciation of the voluminous evidence, should the court
avoid the arbitration agreement by dismissing a Section 8 application and proceed with
trying the suit on merits. The SC held that the allegations in this case were not so serious
that an arbitrator would be unable to rule on it and directed the parties to arbitration. To
save the time of parties, the SC also appointed an arbitrator for the present dispute.
2. 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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BOOZ ALLEN &

 In a landmark judgment, Booz Allen and Hamilton Inc. v. SBI

 Clause 16 of the deposit agreement provided for arbitration.

2. Section 8 talks about “Power to refer parties to arbitration

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