IDFC FIRST BANK LIMITED v. HITACHI MGRM NET LIMITED

(D) That insofar as the maintainability of the present writ petition is concerned, the Petitioner’s only remedy under the Arbitration Act is to wait for the final award and raise a challenge under Section 34 of the said Act. Even issues relating to the jurisdiction ought not to be entertained at the stage of Section 16 application under the Arbitration Act, 1996. Specific reliance is placed upon the ld. Division Bench’s judgement of the Bombay High Court in ‘ Tagus Engineering Private limited vs. Reserve Bank of India & Ors. in W.P(C) 3957 of 2021 dated 21st February 2022 [MANU/MHOR/28215/2022] wherein under similar circumstances, in a writ petition arising out of an order under Section 16 of the Arbitration Act the court held that the matter ought to be relegated to the Arbitral Tribunal under Section 34 of the Arbitration Act. Reliance is also placed on Bhaven Construction vs. Executive Engineer Sardar Sarovar Nigam[(2021) SCC OnLine SC 8) and Deep industries Ltd. vs ONGC [(2020) 15 SCC 706] wherein it is held that under writ jurisdiction the courts should refrain from interfering with the orders of the Arbitral tribunal, if an alternate remedy exits, which in this case it does. Reliance is placed upon Surendra Kumar Singhal & Ors. vs. Arun Kumar Bhalotia & Ors., Tagus Engineering Private Limited & Ors. vs. Reserve Bank of India & Anr. and IDFC First Bank Limited vs. Bell Invest India Limited & Anr. in support of this submission. (E) That the Petitioner filed its claims before the Arbitral tribunal to the tune of approx. Rs. 300 crores. The Respondent has also raised a counter claim of more than Rs. 350 crores and if this matter is now relegated to the DRT, the Respondent would be left with no efficacious remedy or there would be multiplicity of proceedings and conflicting rulings. (F) That though an Arbitral tribunal cannot entertain claims for ‘debts’ due by banks and financial institutions, there is no such bar on an Arbitral Tribunal from entertaining claims against banks and financial institutions which have been made by way of counter claims by Hitachi against IDFC Bank in the present matter. Reliance is placed on Rajasthan Limited vs. VCK Shares & Stock Broking Services in support of this submission. It is further submitted that even if the application under Section 16 had been allowed and Hitachi were to file its counter claims before the Debt recovery tribunal, the claims of Hitachi would be hit by the statute of limitation. Moreover the choice of forum would be that of Hitachi which can continue to pursue its claims before the Arbitral Tribunal. (G) That in terms of Section 16(2) of the Arbitration Act, a plea that the Arbitral tribunal does not have jurisdiction must be raised not later than the submission of the statement of defence. It is stated that in the present matter the statement of defence was filed by the respondent along with the counter claim on 10th December 2020. However, the Petitioner filed the said Application only on 24th February 2021, thereby making the instant application bad in law. Rejoinder Submissions by the Petitioner

9. Mr. Tripathi, ld. senior counsel, appearing for the Bank, in rejoinder, again reiterates the dictum of the Supreme court in Vidya Drolia & Ors. vs. Durga trading Corporation [(2021) 1 Supreme Court Cases (Civ) 549:2020] which categorically holds that the matters which are covered by the RDB Act,1993 would not be arbitrable. Since the issue itself has been decided in Vidya Drolia (supra) the ld. Division Bench order of the Bombay High Court would be of no relevance.

10. Further the question as to whether the liability under the present dispute is a debt cannot be decided by the Arbitral Tribunal because on the face of the provisions i.e., Section 6 and Section 2(g) of the RDB Act,1993 are covered by banking activities. He further concedes that though there may not be typical activities such as the giving of loans by the banks, the activities fall within the definition which is wide enough to take within its purview all business activities undertaken by the bank or which are incidental or conducive to the advancement of the business.

11. Emphasis is again laid on the provisions of the RDB Act,1993 to submit that the said agreements were entered into for expanding the user base which itself is a core activity of the bank.

12. Lastly, Mr. Tripathi submits that the Respondent is not left without remedy inasmuch as section 19(7) to section 19(9) of the RBD Act, the Respondent-Hitachi is free to set up a counter claim if and when the matter is before the Arbitral Tribunal. Analysis and Findings

13. In the present case, the application filed by the Petitioner-IDFC Bank under Section 16 of the Arbitration and Conciliation Act, 1996 has been dismissed by the Arbitral Tribunal. Since the same is not appealable under Section 37 of the Arbitration and Conciliation Act,1996 the present writ petition has been filed.

14. Section 16 of the Arbitration and Conciliation Act, 1996 permits any party to raise an objection relating to the jurisdiction of the Arbitral Tribunal including any objection in relation to the existence or the validity of the Arbitration Agreement. Such a plea was raised in the present case before the three-member Arbitral Tribunal by filing a Section 16 application. It is well settled that the said plea ought to be raised at the earliest stage in the proceedings. However, in the present case, the delay in raising the plea is sought to be justified on the basis of the change in legal position as a result of the decision in Vidya Drolia (supra).

15. The basic premise on which the lack of jurisdiction was alleged was that the Petitioner is a bank. It had a claim of recovery of money from the Respondent. The said recoverable amount constitutes a `debt’ as defined under Section 2(g) of the RDB Act,1993. The Debt Recovery Tribunal constituted under the RDB Act,1993 has the exclusive jurisdiction to deal with this dispute. As per the Petitioner, the amount recoverable arising out of the present dispute being ‘debt’ in terms of the RDB Act,1993 is thus not arbitrable as held in the decision of the Supreme Court in Vidya Drolia & Ors. v. Durga Trading Corporation as also in terms of Section 18 of the RDB Act,1993.

16. It is the case of the Petitioner that under the Banking Regulation Act, 1949, the Petitioner is a licensed entity and considering the nature of the agreement between the parties, the same would constitute banking business under Section 6 of the Banking Regulation Act,1949.

17. So long as the Petitioner is functioning within the provisions of the Banking Regulations Act,1949 it can invoke the jurisdiction of the Debt recovery Tribunal against the Respondent. The contention of the Respondent that its claim against the Bank cannot be entertained, is refuted on the ground that in the Debt Recovery Tribunal, the Respondent can file a counter claim.

18. In the background of the above facts, the issues that arise for determination are twofold: i) Whether the present writ petition is maintainable and is liable to be entertained; ii) Whether the arbitral proceedings ought to continue in view of the objection as to the non-arbitrability raised.

19. The Petitioner has raised various grounds to argue that the disputes are non-arbitrable. The said objections have been rejected by the Arbitral Tribunal vide a detailed order.

20. Section 37 of the Arbitration and Conciliation Act, 1996 permits an appellate remedy in case the Arbitral Tribunal accepts the plea of jurisdiction. Section 37 reads as under:

21. The above provision makes it clear that an order passed under Section 16 is appealable if the plea raised is held to be maintainable and the arbitral proceedings are terminated. However, if the plea is rejected and the arbitral proceedings continue, no appeal is provided. Clearly, therefore, the intention is not to permit an appellate remedy in case the Arbitral Tribunal holds that it has jurisdiction to proceed with the reference. Further, an order under Section 16 which is not appealable under Section 37 would, in the scheme of the Arbitration and Conciliation Act,1996 be liable to be challenged only once the final award is passed by invoking the terms of Section 34 of the Act.

22. When applications under Section 16 are dismissed by the Arbitral Tribunals, the remedy of writ jurisdiction is invoked in some cases. The Supreme Court dealt with an identical situation in ‘Deep Industries Ltd. v ONGC Ltd. (2020) 15 SCC 706.’ In the said decision, the Supreme Court held as under: “i) There was no doubt whatsoever that if petitions were to be filed under Articles 226/227 of the Constitution against orders passed in appeals under Section 37 of Act, the entire arbitral process would be derailed and would not come to fruition for many years. Article 227 is a constitutional provision which remains untouched by the nonobstante Clause of Section 5 of the Act. In these circumstances, what was important to note was that though petitions could be filed under Article 227 against judgments allowing or dismissing first appeals under Section 37 of the Act, yet the High Court would be extremely circumspect in interfering with the same, taking into account the statutory policy so that interference was restricted to orders that were passed which are patently lacking in inherent jurisdiction.

(ii) A Section 16 application had been dismissed by the Arbitrator in which substantially the same contention which found favour with the High Court was taken up. The drill of Section 16 of the Act was that where a Section 16 application was dismissed, no appeal was provided and the challenge to the Section 16 application being dismissed must await the passing of a final award at which stage it may be raised under Section 34. What the High Court had done in the present case was to invert this statutory scheme by going into exactly the same matter as was gone into by the arbitrator in the Section 16 application, and then decided that the two year ban was no part of the notice for arbitration, a finding which was directly contrary to the finding of the Arbitrator dismissing the Section 16 application. For this reason alone, the judgment under appeal needs to be set aside….”

23. This judgment has again been reiterated by the Supreme Court in ‘Bhaven Construction v. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. and Ors. (2022) 1 SCC 75’, where again the Supreme Court has held as under:

24. While there is no doubt that a remedy under Articles 226 and 227 are available against the orders passed by the Arbitral Tribunal, such challenges are not to be entertained in each and every case and the court has to be ‘extremely circumspect’.

25. Recently, in Surendra Kumar Singhal & Ors. v. Arun Kumar Bhalotia & Ors. 279 (2021) DLT 636, this Court, after considering all the decisions, of the Supreme Court[1] has laid down circumstances in which such petitions ought to be entertained. The relevant portion of the said judgment reads as under:

26. A perusal of the above would show that it is only under exceptional circumstances or when there is bad faith or perversity that writ petitions ought to be entertained.

27. The pivot of the Petitioner’s argument to challenge maintainability of arbitral proceedings is on the decision of Vidya Drolia (supra) wherein the Supreme Court has held as under: “58. Consistent with the above, observations in Transcore on the power of the DRT conferred by the DRT Act and the principle enunciated in the present judgment, we must overrule the judgment of the Full Bench of the Delhi High Court in HDFC Bank Ltd. v. Satpal Singh Bakshi, which holds that matters covered under the DRT Act are arbitrable. It is necessary to overrule this decision and clarify the legal position as the decision in HDFC Bank Ltd. has been referred to in M.D. Frozen Foods Exports Private Limited, but not examined in light of the legal principles relating to non-arbitrability. Decision in HDFC Bank Ltd. holds that only actions in rem are non-arbitrable, which as elucidated above is the correct legal position. However, non-arbitrability may arise in case the implicit prohibition in the statute, conferring and creating special rights to be adjudicated by the courts/public fora, which right including enforcement of order/provisions cannot be enforced and applied in case of arbitration. To hold that the claims of banks and financial institutions covered under the DRT Act are arbitrable would deprive and deny these institutions of the specific rights including the modes of recovery specified in the DRT Act. Therefore, the claims covered by the DRT Act are non-arbitrable as there is a prohibition against waiver of jurisdiction of the DRT by necessary implication. The legislation has overwritten the contractual right to arbitration. xxx xxx xxx

78. In view of the aforesaid discussions, we overrule the ratio in N. Radhakrishnan inter alia observing that allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to nonarbitrability. We have also set aside the Full Bench decision of the Delhi High Court in the case of HDFC Bank Ltd. which holds that the disputes which are to be adjudicated by the DRT under the DRT Act are arbitrable. They are non-arbitrable.”

28. On the strength of the submission that the amount recoverable by the Petitioner from the Respondent is a debt, it is urged that the Petitioner would be entitled to approach the Debt Recovery Tribunal. Vidya Drolia(supra) is categorical in holding that the disputes would not be arbitrable as the DRT has jurisdiction.

29. While there can be no doubt that in a case where the Court finds clearly that the dispute is liable to be adjudicated by the Debt Recovery Tribunal (‘DRT’), the same would be non-arbitrable, it cannot be said that such clarity exists in the present case.

30. In the present petition, the following issues would have to be considered in order to decide as to whether the Tribunal has jurisdiction or not: i) The nature of the agreements and the reciprocal obligations; ii) The nature of the transactions and the services to be provided by both parties; iii) Whether the amounts sought to be recovered by the Petitioner would constitute ‘debt’; iv) Whether the nature of services would also come within the definition of ‘banking activities’.

31. The present case is not one which involves traditional banking transactions such as loans, credit facilities, mortgage, etc. It is a case where under the two agreements i.e., SPA and BDA, services have to be rendered by both the parties to each other. Based on the mutual representations and assurances made by both the parties to each other, the parties had vide the SPA agreed to enter into a partnership arrangement with the objective to collaborate with each other in a proactive manner to promote each others business linkages, products and services business in India. The roles and responsibilities of both the parties included promoting business linkages and products and providing user base to the Bank, providing and promoting educational products and services including service platforms, customer services, training staff, ensuring highly secured and safe banking and financial services etc. There are reciprocal obligations. The Petitioner has filed its claims and the Respondent has already filed counter claims. Trial has already commenced in the arbitral proceedings.

32. The determination of the nature of the transactions, their purport and intent, breaches, if any, legality /validity of the termination and finally, amounts payable, if any, would require a factual analysis, and also appreciation of evidence. At the stage of an application under Section 16, the Arbitral Tribunal has taken a view in the matter.

33. Without delving deeper into the submissions which were canvassed before the Court and after examining the nature of the agreements, it cannot be said at this stage that the proceedings before the Tribunal would be barred. This would, however, be subject to the final decision of the Arbitral Tribunal after evidence is led by the parties. At that stage, the Arbitral Tribunal is free to rule on the issues that have been raised before it. If the Petitioner is aggrieved by the same, it is free to avail of its remedies in accordance with law.

34. In the opinion of this Court, the present case does not fall in a category wherein the Court can hold unflinchingly and categorically that the Arbitral Tribunal lacks jurisdiction. The Court is thus inclined to follow the decision of the Bombay High Court in Tagus Engineering Private Limited & Ors. v. Reserve Bank of India and Ors. where, under similar circumstances, the High Court held as under:

35. Relegating the parties to the DRT at this stage would put the clock back completely leading to delays in adjudication. The remedy of arbitration was the chosen remedy by the parties and in the arbitral proceedings trial has already commenced. Thus, the present case does not constitute `exceptional circumstances’ that warrant interference under Art. 226 of the Constitution of India. Following the rulings of the Supreme Court in Deep Industries Ltd. (supra) and Tagus Engineering Private Limited & Ors. (supra), it is held that the present writ petition would not be liable to be entertained under Art. 226 of the Constitution of India. Since the Court is rejecting the petition on maintainability, the issue as to whether the amount due constitutes `debt’ and whether the nature of services would fall within `banking services’ are not being commented upon by the Court.

36. It is, however, made clear that the observations made herein would not bind the Arbitral Tribunal in any manner from taking its own independent view in the matter on all the issues that may be raised by either of the parties. The Petitioner’s remedies against the impugned order as also the final award that may be passed are left open to be availed of, in accordance with law.

37. The present petition is accordingly dismissed in view of the above. All pending applications, if any, are disposed of.

PRATHIBA M. SINGH JUDGE JULY 11, 2023 Rahul/RP