Reportable  IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.5440 OF 2002

Booz Allen and Hamilton Inc. … Appellant

Vs.

SBI Home Finance Ltd. & Ors. … Respondents

J U D G M E N T

R.V.RAVEENDRAN, J.

The scope of section 8 of the Arbitration and Conciliation Act, 1996  

(Act, for short) arises for consideration in this appeal by special leave.

2. Capstone  Investment  Co.  Pvt.  Ltd.  (second  respondent  herein,  for  

short “Capstone”) and Real Value Appliances Pvt.  Ltd. (respondent No.3  

herein,  for short “RV Appliances”) are the owners of flat No.9A and 9B  

respectively situated at  “Brighton”,  Napien Sea Road, Mumbai.  Capstone  

and RV Appliances had borrowed loans from SBI Home Finance Ltd., (the  

first respondent herein, for short “SBI”) under two loan agreements dated  

3.12.1994 by securing the said two flats in favour of SBI.

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3. Under two leave and licence agreements dated 5.4.1996, Capstone and  

RV Appliances permitted the appellant to use their respective flats, for the  

term 1.9.1996 to 31.8.1999. Each licence agreement was signed, in addition  

to the licensor and licensee, by the other flat owner (that is RV Appliances in  

respect of agreement relating to 9A and Capstone in respect of agreement  

relating to 9B) and SBI as confirming parties 1 and 2.    

4. On the same day (5.4.1996) a tripartite deposit agreement was entered  

among  RV Appliances  and  Capstone  as  the  first  party,  appellant  as  the  

second  party  and  SBI  as  the  third  party.  Under  the  said  agreement,  the  

appellant paid a refundable security deposit of Rs.6.5 crores to Capstone and  

RV Appliances (at the rate of Rs.3.25 crores for each flat). Clause (E) of the  

said  agreement  confirmed  that  the  appellant  made  the  said  deposit  and  

Capstone and RV Appliances received the said deposit on the basis of the  

terms and conditions recorded in the two leave and licence agreements and  

the  deposit  agreement;  and  that  the  three  agreements  together  formed  a  

single  integral  transaction,  inseparable,  co-extensive  and  co-terminus  in  

character. Out of the said deposit of Rs.6.5 crores, a sum of Rs.5.5 crores  

was directly paid to SBI on the instructions of Capstone and RV Appliances  

towards repayment of the loan taken by Capstone and Real Value and the  

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balance  of  Rs.1  crore  accounted  in  the  manner  indicated  therein.  As  a  

consequence, the loan due by Capstone to SBI in regard to flat No.9A was  

cleared, but the loan taken by RV Appliances remained due and outstanding.  

Capstone however became a guarantor for repayment of the amount due by  

RV Appliances and flat No.9A was secured in favour of SBI and a charge  

was created in the shares relating to flat No.9A belonging to Capstone in  

favour of SBI, as security for repayment of the loan by R V Appliances. We  

extract below the relevant portion of para 5A of the agreement :

“However,  notwithstanding  the  repayment  of  the  dues  of  Capstone  Investment Co.Pvt.Ltd.,  the share Nos.4001 to 4250 of the Society and  Flat No.9A shall continue to be available to the Party of the Third Part as  security of the remaining dues of Real Value Appliances Ltd., and in this  connection  it  is  agreed  that  upon  liquidating  the  dues  of  Capstone  Investment  Co.Pvt.Ltd.,  and in order  to make available the said shares  Nos.4001  to  4250  and  Flat  No.9A  as  security,  Capstone  Investment  Co.Pvt.Ltd. shall become a Guarantor for repayment of dues of Real Value  Appliances Pvt.Ltd. The Parties of the Third Part are confirming that it has  no  objection  to  the  Party  of  the  Second  Part,  its  employee  or  officer  occupying the Flats and that as long as the balance of the principal amount  and interest due thereon is paid by the Parties of the First Part (or as per  arrangement hereafter recorded) by the Party of the Second Part to Party  of  the  Third  Part,  the  Parties  of  the  Third  Part  shall  not  enforce  the  mortgage and will permit the Party of the Second Part, its employee or  officer to occupy the said Flats.”

Clause (3) of the Deposit agreement gave an option to the appellant who  

opted to continue the licence in respect of the two flats for a further period of  

two years beyond 31.8.1999, by paying an additional deposit of Rs.2 crores  

(at the rate of Rs.1 crore for each flat). Clause (11) enabled the appellant to  

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continue to use and occupy the flats so long as the amounts paid by it as  

security deposit remained unpaid.

Clause (8) gave the option to the appellant to pay the amount due to the SBI  

on  behalf  of  the  borrowers  to  safeguard  its  interest.  Relevant  portion  of  

para 8 is extracted below:

“If  any default  is  made by the  Parties  of  the  First  Part  in  paying  any  sum(s) due from time to time by them to the Parties of the Third Part  under the loan facility, the Party of the Second Part shall, to safeguard its  interest in retaining the right to use and occupy the said Flats, have an  option to pay the Parties of the Third Part the sum(s) so becoming due and  remaining unpaid by the Parties of the First Part, on their behalf.”

Clauses (9) and (10) provide that at the end of the licence period, Capstone  

and R V Appliances shall jointly and severally be liable to refund the deposit  

amount along with interest thereon from the date of expiry of the licence to  

date of actual payment  

Clause  (16)  of  the  deposit  agreement  provided  for  arbitration  and  is  

extracted below:   

“In case of any dispute with respect to creation and enforcement of charge  over the said shares and the said Flats and realization of sales proceeds  therefrom, application of sales proceeds towards discharge of liability of  the Parties of the First Part to the parties of the Second Part and exercise  of the right of the Party of the Second Part to continue to occupy the said  Flats  until  entire dues as recorded in Clause 9 and 10 hereinabove are  realized by the party of the Second Part, shall be referred to an Arbitrator  who shall be retired Judge of Mumbai High Court and if no such Judge is  

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ready  and  willing  to  enter  upon  the  reference,  any  Senior  Counsel  practicing  in  Mumbai  High  Court  shall  be  appointed  as  the  Sole  Arbitrator. The Arbitrator will be required to cite reasons for giving the  award. The arbitration proceedings shall be governed by the Arbitration  and  Conciliation  Ordinance  1996  or  the  enactment,  re-enactment  or  amendment thereof. The arbitration proceedings shall be held at Mumbai.”

5. In or about July 1997 a reference was made by RV Appliances to the  

Board of Industrial and Financial Reconstruction (BIFR for short) under the  

Sick Industrial Companies (Special Provisions) Act, 1985 and in pursuance  

of it, flat 9B was taken over by the official liquidator.

6. By  letter  dated  4.8.1999,  appellant  informed  Capstone  and  RV  

Appliances that it was not interested in exercising the option to renew the  

licences on expiry of the leave and licence agreements on 31.8.1999 and  

called upon the licensors  to  refund the security  deposit  of  Rs.6.5  crores,  

assuring that it would vacate and deliver up the licensed flats on receipt of  

the  deposit  amount.  The  appellant  informed  SBI  and  BIFR  about  it  by  

endorsing copies of the said letters to them. As there was no confirmation  

from Capstone and RV Appliances that they would refund the sum of Rs.6.5  

crores,  the  appellant  wrote  a  further  letter  dated 26.8.1999 stating that  it  

would continue to occupy the flats if the security deposit was not refunded.

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7. As the loan amount due by RV Appliances was not repaid, SBI filed a  

mortgage  suit  (Suit  No.6397/1999)  in  the  High  Court  of  Bombay  on  

28.10.1999 against Capstone (first defendant), appellant (second defendant),  

and RV Appliances (defendant No.3) in regard to the mortgaged property  

(flat No.9A) for the following reliefs:    

(a) for a declaration that the 1st defendant as mortgagor was due  in a sum of Rs.8,46,10,731/-   with further  interest  on the  principal  sum  at  the  rate  of  Rs.16.5%  per  annum  and  additional interest for delayed payment at the rate of 2% per  month from 1st September, 1999 till payment or realization;

(b) for a declaration that the amount and interest mentioned in  prayer (a) above is secured in favour of the plaintiffs by a  valid  and  subsisting  mortgage  of  flat  No.9A  and  three  garages (suit premises);  

(c) for a direction to the first defendant to pay to the plaintiff the  amount and interest  in prayer (a) by such date as may be  fixed by the Court for redemption of the mortgage and in the  event of the first defendant failing to make payment by that  date, the suit premises be sold by and under the orders and  directions of the Court in enforcement and realization of the  mortgage thereon and the net realization thereof be paid over  to the plaintiff in or towards satisfaction of its claim herein;

(d) for a personal decree against the first defendant to the extent  of any deficiency in sale realization;

(e) that  the  second  defendant  be  ordered  to  vacate  the  suit  premises and hand over possession thereof to the plaintiff to  enable  the  plaintiff  effectively  to  enforce  and  realize  its  security thereon.”

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8. On a notice of motion taken out by SBI seeking interim relief,  the  

High Court issued the following order on 25.11.1999 :    

“The Defendant No.2 shall continue to occupy Flat No.9A and garages  Nos. 45 to 47 situate at Brighton, 68D, Napean Sea Road, Mumbai but  shall not create any third party right or interest of any nature whatsoever in  the said flat nor shall hand over possession of the said flat to defendant  No.1 or 3 till further order.  

Mr. Dharmadhikari, learned counsel for first defendant makes a statement  that till further orders, the first defendant shall not create any third party  interest in the said flat No.9A and garages Nos.45 to 47 nor shall alienate,  dispose of or transfer the said property till further orders. Statement of Mr.  Dharmadhikari is accepted.”

On 15.12.1999  the  appellant  filed  a  detailed  reply  to  the  said  notice  of  

motion. It inter alia contended that SBI had a contractual obligation towards  

the appellant as it had agreed for the continuance of appellants’ occupation  

till refund of the deposit. Capstone also contested the application, denying  

the existence of any mortgage or charge over flat No.9A.

9. The appellant however did not file its written statement in the suit.  

The appellant claims that settlement talks were being held for some time but  

did not fructify into any settlement. Therefore, on 10.10.2001, the appellant  

took out a notice of motion praying that the parties to the suit be referred to  

arbitration as provided in clause 16 of the deposit agreement dated 5.4.1996  

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and consequently the suit be dismissed. The said application was resisted by  

the SBI.  

10. A  learned  single  Judge  of  the  High  Court  by  impugned  order  

dated 7.3.2002 dismissed the application holding as follows:

(a) Clause 16 of  the deposit  agreement  (arbitration agreement)  did not  

cover the dispute which is the subject matter of the claim by SBI against its  

borrowers (Capstone and RV Appliances) and therefore, it was not open to  

the appellant to request the court to refer the parties to arbitration.

(b) The detailed counter affidavit dated 15.12.1999 filed by the appellant,  

in  regard  to  the  notice  of  motion  for  temporary  injunction,  amounted  to  

submission  of  the  first  statement  on the  substance of  the  dispute,  before  

filing the application under section 8 of the Act and therefore the appellant  

lost the right to seek reference to arbitration.

(c) The  suit  was  filed  on  28.10.1999.  The  appellant  filed  the  counter  

affidavit opposing the application for temporary injunction on 15.12.1999.  

The application under section 8 of the Act was filed on 10.10.2001 nearly 20  

months thereafter, during which period the appellant had subjected itself to  

the  jurisdiction  of  the  High  Court.  In  view  of  the  inordinate  delay,  the  

appellant was not entitled to the relief under section 8 of the Act.  

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The said order is challenged in this appeal by special leave. This court while  

granting leave on 28.8.2002 stayed the further proceedings in the suit.  

11. The appellant contends that the parties to the suit were all parties to  

the deposit agreement containing the arbitration agreement. The claim of the  

SBI  was  for  enforcement  of  the  charge/mortgage  over  flat  No.9A  and  

realization of the sale proceeds therefrom, which was specifically mentioned  

as a dispute which was arbitrable. Having regard to the clear mandate under  

section  8  of  the  Act,  the  court  ought  to  have  referred  the  parties  to  

arbitration. SBI supported the order  

12. In  S.B.P & Co. vs. Patel Engineering Ltd – 2005 (8) SCC 618, this  

Court held thus :  

“When the defendant to an action before a judicial authority raises the plea  that there is an arbitration agreement and the subject matter of the claim is  covered  by  the  agreement  and  the  plaintiff  or  the  person  who  has  approached the judicial authority for relief disputes the same, the judicial   authority, in the absence of any restriction in the Act, has necessarily to   decide whether, in fact, there is in existence a valid arbitration agreement   and whether the dispute that is sought to be raised before it is covered by  the  arbitration  clause. It  is  difficult  to  contemplate  that  the  judicial  authority has also to act mechanically or has merely to see the original  arbitration agreement produced before it and mechanically refer the parties  to an arbitration.”

(emphasis supplied)

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Where a suit is filed by one of the parties to an arbitration agreement against  

the other parties to the arbitration agreement, and if the defendants file an  

application  under  section  8  stating  that  the  parties  should  be  referred  to  

arbitration,  the  court  (judicial  authority)  will  have to decide  (i)  whether  

there is an arbitration agreement among the parties; (ii) whether all parties to  

the suit  are parties  to the arbitration agreement;  (ii)  whether  the disputes  

which are the subject matter of the suit fall within the scope of arbitration  

agreement; (iv) whether the defendant had applied under section 8 of the Act  

before submitting his first statement on the substance of the dispute; and (v)  

whether the reliefs sought in the suit are those that can be adjudicated and  

granted in an arbitration.  

13. On  the  contentions  urged  the  following  questions  arise  for  our  

consideration :

(i) Whether  the subject  matter  of the suit  fell  within the scope of the  arbitration  agreement  contained  in  clause  16  of  the  deposit  agreement?

(ii) Whether  the  appellant  had  submitted  his  first  statement  on  the  substance of the dispute before filing the application under section 8  of the Act?

(iii) Whether the application under section 8 was liable to be rejected as it  was filed nearly 20 months after entering appearance in the suit?

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(iv) Whether the subject matter of the suit is ‘arbitrable’, that is capable of  being adjudicated by a private forum (arbitral tribunal); and whether  the  High  Court  ought  to  have  referred  the  parties  to  the  suit  to  arbitration under section 8 of the Act?

Re : Question No.(i)  

14. In this case, there is no dispute that all the parties to the suit are parties  

to an agreement which contains the provision for settlement of disputes by  

arbitration.  Clause  (16)  which  provides  for  arbitration  provides  for  

settlement of the following disputes by arbitration : (a) disputes with respect  

to creation of charge over the shares and flats; (b) disputes with respect to  

enforcement of the charge over the shares and flats and realization of sale  

proceeds therefrom; (c) application of the sale proceeds towards discharge of  

liability of Capstone and RV Appliances to the appellant; and (e) disputes  

relating to exercise of right of the appellant to continue to occupy the flats  

until the entire dues as stated in clauses 9 and 10 of the deposit agreement  

are realised by the appellant.  

15. The suit has been filed by SBI to enforce the mortgage to recover the  

amounts due to it. In that context, SBI has also sought delivery of vacant  

possession. The enforcement of the charge/mortgage over the flat, realisation  

of sale proceeds therefrom and the right of the appellant to stay in possession  

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till  the  entire  deposit  is  repaid,  are  all  matters  which  are  specifically  

mentioned in clause 16 as matters to be settled by arbitration. Therefore, the  

subject matter of the suit falls within the scope of the arbitration agreement.  

Re : Question No.(ii)

16. The appellant filed a detailed affidavit  opposing the application for  

interim  injunction  on  15.12.1999.  Thereafter  the  appellant  filed  the  

application under section 8 of the Act on 12.10.2001. On the date of filing of  

the  application  under  section  8,  the  appellant  had  not  filed  the  written  

statement.  Section  8  of  the  Act  provides  that  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 his first  

statement on the substance of the dispute, refer the parties to arbitration. The  

High Court has held that filing a detailed counter affidavit by a defendant  

setting  out  its  case,  in  reply  to  an  application  for  temporary  injunction,  

should  be  considered  to  be  the  submission  of  the  first  statement  on  the  

substance of the dispute; and that the application under section 8 of the Act  

having  been  filed  subsequent  to  filing  of  such  first  statement  on  the  

substance of the dispute, the appellant’s prayer for referring the parties to  

arbitration cannot be accepted.  The question therefore is  whether  filing a  

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counter  to  an  application  for  temporary  injunction  can  be  considered  as  

submitting the first statement on the substance of the dispute.  

17. Not only filing of the written statement in a suit,  but filing of any  

statement, application, affidavit filed by a defendant prior to the filing of the  

written statement  will  be construed as ‘submission of  a statement on the  

substance of the dispute’, if by filing such statement/application/affidavit,  

the defendant shows his intention to submit himself to the jurisdiction of the  

court and waive his right to seek reference to arbitration. But filing of a reply  

by a defendant, to an application for temporary injunction/attachment before  

judgment/appointment of  Receiver, cannot be considered as submission of a  

statement on the substance of the dispute, as that is done to avoid an interim  

order  being  made  against  him.  In  Rashtriya  Ispat  Nigam Ltd  vs.  Verma  

Transport Company – 2006 (7) SCC 275, this Court held that the expression  

'first statement on the substance of the dispute' contained in Section 8(1) of  

the Act is different from the expression 'written statement', and refers to a  

submission of the party making the application under section 8 of the Act, to  

the jurisdiction of the judicial authority; and what should be decided by the  

court is whether the party seeking reference to arbitration has waived his  

right to invoke the arbitration clause. This Court then proceeded to consider  

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whether  contesting  an  application  for  temporary  injunction  by  filing  a  

counter, would amount to subjecting oneself to the jurisdiction of the court.  

This Court observed :  

“By opposing the prayer for interim injunction, the restriction contained in  Sub-section (1) of Section 8 was not attracted. Disclosure of a defence for  the  purpose  of  opposing  a  prayer  for  injunction  would  not  necessarily  mean that substance of the dispute has already been disclosed in the main  proceeding.  Supplemental  and incidental  proceeding are not part  of the  main  proceeding.  They  are  dealt  with  separately  in  the  Code  of  Civil  Procedure itself. Section 94  of the Code of Civil Procedure deals with  supplemental  proceedings.  Incidental  proceedings are those which arise  out of the main proceeding. In view of the decision of this Court in Food  Corporation of India vs.  Yadav Engineer & Contractor – 1982 (2) SCC  499,  the  distinction  between  the  main  proceeding  and  supplemental  proceeding must be borne in mind. …….. Waiver of a right on the part of  a defendant to the lis must be gathered from the fact situation obtaining in  each case. In the instant case, the court had already passed an ad interim  ex pare injunction. The Appellants were bound to respond to the notice  issued by the Court.”

18. In  this  case,  the  counter  affidavit  dated  15.12.1999,  filed  by  the  

appellant in reply to the notice of motion (seeking appointment of a receiver  

and grant of a temporary injunction) clearly stated that the reply affidavit  

was being filed for the limited purpose of opposing the interim relief. Even  

in  the  absence  of  such  a  disclaimer,  filing  a  detailed  objection  to  an  

application for  interim relief  cannot  be considered to be submission of a  

statement on the substance of the dispute resulting in submitting oneself to  

the jurisdiction of the court.  

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Re : Question No.(iii)

19. Though  section  8  does  not  prescribe  any  time  limit  for  filing  an  

application  under  that  section,  and only  states  that  the  application  under  

section 8 of the Act should be filed before 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. Obviously, a party who willingly participates in the proceedings  

in  the  suit  and  subjects  himself  to  the  jurisdiction  of  the  court  cannot  

subsequently  turn  round  and  say  that  the  parties  should  be  referred  to  

arbitration in view of the existence of an arbitration agreement. Whether a  

party has waived his right to seek arbitration and subjected himself to the  

jurisdiction of the court, depends upon the conduct of such party in the suit.  

When  plaintiffs  file  applications  for  interim relief  like  appointment  of  a  

receiver or grant of a temporary injunction, the defendants have to contest  

the application. Such contest may even lead to appeals and revisions where  

there may be even stay of further proceedings in the suit. If supplemental  

proceedings like applications for temporary injunction on appointment of  

Receiver, have been pending for a considerable time and a defendant has  

been contesting such supplemental proceedings, it  cannot be said that the  

defendant has lost the right to seek reference to arbitration.  At the relevant  

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time, the unamended Rule 1 of Order VIII of the Code was governing the  

filing of written statements and the said rule did not prescribe any time limit  

for  filing  written  statement.  In  such  a  situation,  mere  passage  of  time  

between the date of entering appearance and date of filing the application  

under section 8 of the Act,  can not lead to an inference that a defendant  

subjected himself to the jurisdiction of the court for adjudication of the main  

dispute. The facts in this case show that the plaintiff in the suit had filed an  

application for temporary injunction and appointment of Receiver and that  

was pending for some time. Thereafter, talks were in progress for arriving at  

a  settlement  out  of  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 High Court was not therefore  

justified in rejecting the application on the ground of delay.

Re : Question (iv)  

20.   The  nature  and  scope  of  issues  arising  for  consideration  in  an  

application under section 11 of the Act for appointment of arbitrators, are far  

narrower than those arising in an application under section 8 of the Act,  

seeking reference of the parties to a suit to arbitration.  While considering an  

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application under section 11 of the Act, the Chief Justice or his designate  

would not embark upon an examination of the issue of  ‘arbitrability’ or  

appropriateness  of adjudication by a private forum, once he finds that there  

was an arbitration agreement between or among the parties, and would leave  

the  issue of  arbitrability  for  the decision of  the arbitral  Tribunal.   If  the  

arbitrator wrongly holds that the dispute is arbitrable,  the aggrieved party  

will have to challenge the award by filing an application under section 34 of  

the Act, relying upon  sub-section 2(b)(i) of that section. But where the issue  

of ‘arbitrability’ arises in the context of an application under section 8 of the  

Act in a pending suit, all aspects of arbitrability have to be decided by the  

court seized of the suit, and cannot be left to the decision of the Arbitrator.  

Even if there is an arbitration agreement between the parties, and even if the  

dispute is covered by the arbitration agreement, the court where the civil suit  

is pending, will refuse an application under Section 8 of the Act,  to refer the  

parties  to  arbitration,  if  the  subject  matter  of  the  suit  is  capable  of  

adjudication only by a public forum or the relief claimed can only be granted  

by a special court or Tribunal.   

21. The term ‘arbitrability’ has different meanings in different contexts.  

The three facets of arbitrability, relating to the jurisdiction of the arbitral  

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tribunal, are as under : (i) whether the disputes are capable of adjudication   

and settlement by arbitration? That is, whether the disputes, having regard  

to their nature, could be resolved by a private forum chosen by the parties  

(the  arbitral  tribunal)  or  whether  they  would  exclusively  fall  within  the  

domain of public fora (courts). (ii) Whether the disputes are covered by the  

arbitration  agreement?  That  is,  whether  the  disputes  are  enumerated  or  

described in the arbitration agreement as matters to be decided by arbitration  

or whether the disputes fall under the ‘excepted matters’ excluded from the  

purview of the arbitration agreement. (iii) Whether the parties have referred  

the  disputes  to  arbitration?  That  is,  whether  the  disputes  fall  under  the  

scope of the submission to the arbitral tribunal, or whether they do not arise  

out of the statement of claim and the counter claim filed before the arbitral  

tribunal. A dispute, even if it is capable of being decided by arbitration and  

falling within the scope of arbitration agreement, will not be ‘arbitrable’ if it  

is not enumerated in the joint list of disputes referred to arbitration, or in the  

absence of  such joint list of disputes, does not form part of the disputes  

raised in the pleadings before the arbitral tribunal.  

22. Arbitral tribunals are private fora chosen voluntarily by the parties to  

the  dispute,  to  adjudicate  their  disputes  in  place  of  courts  and  tribunals  

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which are public fora constituted under the laws of the country. Every civil  

or commercial dispute, either contractual or non-contractual, which can be  

decided by a court, is in principle capable of being adjudicated and resolved  

by arbitration unless the jurisdiction of arbitral tribunals is excluded either  

expressly or by necessary implication. Adjudication of certain categories of  

proceedings are reserved by the Legislature exclusively for public fora as a  

matter  of  public  policy.  Certain  other  categories  of  cases,  though  not  

expressly reserved for adjudication by a public fora (courts and Tribunals),  

may by necessary implication stand excluded from the purview of private  

fora. Consequently, where the cause/dispute is inarbitrable, the court where a  

suit is pending, will refuse to refer the parties to arbitration, under section 8  

of the Act,  even if  the parties  might have agreed upon arbitration as the  

forum for  settlement  of  such disputes.  The  well  recognized  examples  of  

non-arbitrable  disputes are  :   (i)  disputes  relating to rights  and liabilities  

which give rise to or arise out of criminal offences; (ii) matrimonial disputes  

relating to divorce, judicial separation, restitution of conjugal rights, child  

custody; (iii) guardianship matters; (iv) insolvency and winding up matters;  

(v)  testamentary  matters  (grant  of  probate,  letters  of  administration  and  

succession  certificate);  and  (vi)  eviction  or  tenancy  matters  governed  by  

special statutes where the tenant enjoys statutory protection against eviction  

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and only the specified courts are conferred jurisdiction to grant eviction or  

decide the disputes.  

23. It may be noticed that the cases referred to above relate to actions in  

rem. A  right  in  rem is  a  right  exercisable  against  the  world  at  large,  as  

contrasted from a  right in personam which is an interest  protected solely  

against  specific  individuals.  Actions  in  personam refer  to  actions  

determining the rights and interests of the parties themselves in the subject  

matter of the case, whereas actions  in rem refer to actions determining the  

title to property and the rights of the parties, not merely among themselves  

but also against all persons at any time claiming an interest in that property.  

Correspondingly,  judgment  in  personam refers  to  a  judgment  against  a  

person as distinguished from a judgment against a thing, right or status and  

Judgment in rem refers to a judgment that determines the status or condition  

of property which operates directly on the property itself. (Vide : Black’s  

Law Dictionary). Generally and traditionally all disputes relating to rights in  

personam are  considered  to  be  amenable  to  arbitration;  and  all  disputes  

relating to rights in rem are required to be adjudicated by courts and public  

tribunals, being unsuited for private arbitration. This is not however a rigid  

or  inflexible  rule.  Disputes  relating  to  sub-ordinate  rights  in  personam  

arising from rights in rem have always been considered to be arbitrable.

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24. The Act  does  not  specifically  exclude  any category  of  disputes  as  

being not arbitrable. Sections 34(2)(b) and 48(2) of the Act however make it  

clear  that  an  arbitral  award will  be set  aside  if  the  court  finds  that  “the  

subject-matter of the dispute is not capable of settlement by arbitration under  

the law for the time being in force.”

25. Russell  on  Arbitration  [22nd Edition]  observed  thus  [page  28,  

para 2.007] :  

“Not all matter are capable of being referred to arbitration. As a matter of  English  law  certain  matters  are  reserved  for  the  court  alone  and  if  a  tribunal  purports  to  deal  with  them  the  resulting  award  will  be  unenforceable. These include matters where the type of remedy required is  not one which an arbitral tribunal is empowered to give.”

The subsequent  edition of  Russell  [23rd Edition,  page 470,  para  8.043] ]  

merely observes that English law does recognize that there are matters which  

cannot be decided by means of arbitration.  Mustill and  Boyd in their Law  

and Practice  of  Commercial  Arbitration in England [2nd – 1989 Edition],  

have observed thus :  

“In  practice  therefore,  the  question  has  not  been  whether  a  particular  dispute is capable of settlement by arbitration, but whether it ought to be   referred  to  arbitration or  whether  it  has  given  rise  to  an  enforceable  award. No doubt for this reason, English law has never arrived at a general  theory  for  distinguishing  those  disputes  which  may  be  settled  by  arbitration from those which may not. …….

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Second, the types of remedies which the arbitrator can award are limited  by considerations of public policy and by the fact that he is appointed by  the parties and not by the state. For example, he cannot impose a fine or a  term of imprisonment, commit a person for contempt or issue a writ of  subpoena; nor can he make an award which is binding on third parties or   affects the public at large, such as a judgment in rem against a ship, an  assessment of the rateable value of land, a divorce decree, a winding-up  order….”  

[emphasis supplied]

Mustill and  Boyd in their  2001 Companion Volume to the 2nd Edition of  

commercial Arbitration, observe thus (page 73) :  

“Many commentaries treat it as axiomatic that ‘real’ rights, that is rights  which  are  valid  as  against  the  whole  world,  cannot  be  the  subject  of   private arbitration, although some acknowledge that subordinate rights in  personam derived from the real rights may be ruled upon by arbitrators.  The conventional  view is  thus  that,  for  example,  rights  under  a  patent  licence may be arbitrated, but the validity of the underlying patent may  not…..An arbitrator whose powers are derived from a  private agreement  between A and B plainly has no jurisdiction to bind anyone else by a  decision on whether a patent is valid, for no-one else has mandated him to  make such a decision, and a decision which attempted to do so would be  useless.”  

(Emphasis supplied)

26. The distinction between disputes which are capable of being decided  

by arbitration, and those which are not, is brought out in three decisions of  

this Court.  

26.1) In  Haryana Telecom Limited vs. Sterlite Industries India Ltd – 1999  

(5) SCC 688, this Court held :  

“Sub-section (1) of Section 8 provides that the judicial authority before  whom an action is brought in a matter, will refer the parties to arbitration  

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the  said  matter  in  accordance  with  the  arbitration  agreement.  This,  however,  postulates,  in  our  opinion,  that  what  can  be  referred  to  the  arbitrator is only that dispute or matter which the arbitrator is competent or  empowered to decide.

The claim in a petition for winding up is not for money. The petition filed  under the Companies Act would be to the effect, in a matter like this, that  the company has become commercially insolvent and, therefore, should be  wound up.  The power  to order  winding up of  a  company is  contained  under the Companies Act and is conferred on the court.  An arbitrator,   notwithstanding  any  agreement  between  the  parties,  would  have  no  jurisdiction  to  order  winding  up  of  a  company.  The  matter  which  is  pending before the High Court in which the application was filed by the  petition herein was relating to winding up of the Company.  That could  obviously not be referred to arbitration and, therefore, the High Court, in  our opinion was right in rejecting the application.”

(Emphasis supplied)

26.2) A  different  perspective  on  the  issue  is  found  in  Olympus  

Superstructures Pvt Ltd vs. Meena Vijay Khetan and others – 1999 (5) SCC  

651, where this Court considered whether an arbitrator has the power and  

jurisdiction to grant specific performance of contracts relating to immovable  

property. This Court held :  

“We are of the view that the right to specific performance of an agreement  of sale deals with contractual rights and it is certainly open to the parties to  agree - with a view to shorten litigation in regular courts - to refer the  issues  relating  to  specific  performance  to  arbitration.  There  is  no  prohibition in the Specific Relief Act, 1963 that issues relating to specific  performance of contract relating to immovable property cannot be referred  to arbitration. Nor is there such a prohibition contained in the Arbitration  and Conciliation Act, 1996 as contrasted with Section 15 of the English  Arbitration Act, 1950 or Section 48(5)(b) of the English Arbitration Act,  1996 which contained a  prohibition relating to specific  performance of  contracts concerning immoveable property.”

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Approving the decision of the Calcutta High Court in Keventer Agro Ltd vs.   

Seegram Comp. Ltd  – (Apo 498 of 1997 etc. dated 27.1.1998), this Court  

held  that  disputes  relating  to  specific  performance  of  a  contract  can  be  

referred  to  arbitration  and  Section  34(2)(b)(i)  will  not  be  attracted.  This  

Court held :  

“Further, as pointed in the Calcutta case, merely because there is need for  exercise of discretion in case of specific performance, it cannot be said  that only the civil court can exercise such a discretion. In the above case,  Ms. Ruma Pal, J. observed:

...merely because  the  sections  of  the Specific  Relief  Act  confer discretion on courts to grant specific performance of  a contract does not means that parties cannot agree that the  discretion will be exercised by a forum of their choice. If  the converse were true, then whenever a relief is dependent  upon the exercise of discretion of a court by statute e.g. the  grant of interest or costs, parties should be precluded from  referring the dispute to arbitration.”  

This Court  further  clarified that  while matters  like criminal offences and  

matrimonial disputes may not be subject matter of resolution by arbitration,  

matters incidental thereto may be referred to arbitration :  

“Reference is made there to certain disputes like criminal offences of a  public  nature,  disputes  arising  out  of  illegal  agreements  and  disputes  relating to status, such as divorce, which cannot be referred to arbitration.  It has, however, been held that if in respect of facts relating to a criminal  matter, (say) physical injury, if there is a right to damages for personal  injury, then such a dispute can be referred to arbitration (Keir v. Leeman)  (1846) 9 Q.B, 371. Similarly,  it has been held that a husband and wife  may, refer to arbitration the terms on which they shall separate, because  they can make a valid agreement between themselves on that matter …… ….”

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26.3) In Chiranjilal Shrilal Goenka vs. Jasjit Singh and Ors.- 1993 (2) SCC  

507  this  court  held  that  grant  of  probate  is  a  judgment  in  rem and  is  

conclusive and binding not only the parties but also the entire world; and  

therefore, courts alone will have exclusive jurisdiction to grant probate and  

an arbitral tribunal will not have jurisdiction even if consented concluded to  

by the parties to adjudicate upon the proof or validity of the will.  

27. An agreement to sell or an agreement to mortgage does not involve  

any transfer of right in rem but create only a personal obligation. Therefore  

if specific performance is sought either in regard to an agreement to sell or  

an  agreement  to  mortgage,  the  claim  for  specific  performance  will  be  

arbitrable. On the other hand, a mortgage is a transfer of a right  in rem. A  

mortgage suit  for sale of the mortgaged property is an action  in rem, for  

enforcement of a right  in rem.  A suit  on mortgage is not a mere suit  for  

money. A suit for enforcement of a mortgage being the enforcement of a  

right  in rem, will have to be decided by courts of law and not by arbitral  

tribunals. The scheme relating to adjudication of mortgage suits contained in  

Order  34 of  the Code of  Civil  Procedure,  replaces  some of  the repealed  

provisions of Transfer of Property Act, 1882 relating to suits on mortgages  

(section 85 to 90, 97 and 99) and also provides for implementation of some  

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of the other provisions of that Act (section 92 to 94 and 96). Order 34 of the  

Code does not relate to execution of decrees, but provides for preliminary  

and  final  decrees  to  satisfy  the  substantive  rights  of  mortgagees  with  

reference to their mortgage security. The provisions of Transfer of Property  

Act read with Order 34 of the Code, relating to the procedure prescribed for  

adjudication of the mortgage suits, the rights of mortgagees and mortgagors,  

the  parties  to  a  mortgage suit,  and the  powers  of  a  court  adjudicating  a  

mortgage suit, make it clear that such suits are intended to be decided by  

public fora (Courts) and therefore, impliedly barred from being referred to or  

decided by private fora (Arbitral Tribunals).  We may briefly refer to some  

of the provisions which lead us to such a conclusion.  

 (i) Rule (1) of Order 34 provides that subject  to the provisions of the  

Code, all persons having an interest either in the mortgage security or in the  

right of redemption shall have to be joined as parties to any suit relating to  

mortgage, whether they are parties to the mortgage or not. The object of this  

rule is to avoid multiplicity of suits and enable all interested persons, to raise  

their  defences or  claims,  so that  they could also be taken note of,  while  

dealing with the claim in the mortgage suit and passing a preliminary decree.  

A person who has an interest in the mortgage security or right or redemption  

can therefore make an application for being impleaded in a mortgage suit,  

and is  entitled  to  be made a  party.  But  if  a  mortgage suit  is  referred to  

arbitration,  a person who is not  a party  to the arbitration agreement,  but  

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having an interest in the mortgaged property or right of redemption, can not  

get himself impleaded as a party to the arbitration proceedings, nor get his  

claim dealt with in the arbitration proceedings relating to a dispute between  

the  parties  to  the  arbitration,  thereby  defeating  the  scheme  relating  to  

mortgages in the Transfer of Property Act and the Code. It will also lead to  

multiplicity of proceedings with likelihood of divergent results.

(ii) In passing a preliminary decree and final decree, the court adjudicates,  

adjusts and safeguards the interests not only of the mortgagor and mortgagee  

but also puisne/mesne mortgagees, persons entitled to equity of redemption,  

persons having an interest  in the mortgaged property, auction purchasers,  

persons in possession. An arbitral tribunal will not be able to do so.

(iii) The court can direct that an account be taken of what is due to the  

mortgagee and declare the amounts due and direct that if the mortgagor pays  

into court, the amount so found due, on or before such date as the court may  

fix (within six months from the date on which the court confirms the account  

taken or from the date on which the court declares the amount due),  the  

petitioner  shall  deliver  the  documents  and  if  necessary  re-transfer  the  

property to the defendant; and further direct that if the mortgagor defaults in  

payment of such dues, then the mortgagee will be entitled to final decree for  

sale of the property or part thereof and pay into court the sale proceeds, and  

to adjudge the subsequent costs, charges, expenses and interest and direct  

that the balance be paid to mortgagor/defendant or other persons entitled to  

receive the same. An arbitral tribunal will not be able to do so.

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(iv) Where in a suit for sale (or in a suit for foreclosure in which sale is  

ordered),  subsequent  mortgagees  or  persons  deriving  title  from,  or  

subrogated to the rights of any such mortgagees are joined as parties, the  

court while making the preliminary decree for sale under Rule 4(1), could  

provide for adjudication of the respective rights and liabilities of the parties  

to the suit in a manner and form set forth in Form Nos. 9, 10, and 11 of  

appendix ‘D’ to the Code with such variations as the circumstances of the  

case  may require.  In  a  suit  for  foreclosure  in  the  case  of  an  anomalous  

mortgage,  if  the plaintiff  succeeds,  the court  may,  at  the instance of  any  

party to the suit or any other party interested in the mortgage security or the  

right of redemption, pass a like decree in lieu of a decree for foreclosure, on  

such terms as it thinks fit. But an arbitral tribunal will not be able to do.  

(v) The court has the power under Rule 4(2), on good cause being shown  

and upon terms to be fixed by it, from time to time, at any time before a final  

decree is passed, extend the time fixed for payment of the amount found or  

declared due or  the amount adjudged due in respect  of subsequent costs,  

changes, expenses and interest, upon such terms as it deems fit. The Arbitral  

Tribunal will have no such power.

28. A decree for sale of a mortgaged property as in the case of a decree  

for order of winding up, requires the court to protect the interests of persons  

other than the parties to the suit/petition and empowers the court to entertain  

and adjudicate upon rights and liabilities of third parties (other than those  

who  are  parties  to  the  arbitration  agreement).  Therefore,  a  suit  for  sale,  

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foreclosure or redemption of a mortgaged property, should only be tried by a  

public forum, and not by an arbitral tribunal. Consequently, it follows that  

the court where the mortgage suit is pending, should not refer the parties to  

arbitration.  

29. The appellant contended that the suit ultimately raises the following  

core issues, which can be decided by a private forum: (i) Whether there is a  

valid mortgage or charge in favour of SBI? (ii) What is the amount due to  

SBI? and (iii) Whether SBI could seek eviction of appellant from the flat,  

even if it is entitled to enforce the mortgage/charge? It was submitted that  

merely because mortgage suits involve passing of preliminary decrees and  

final decrees, they do not get excluded from arbitrable disputes. It is pointed  

out that the arbitral tribunals can also make interim awards deciding certain  

aspects of the disputes finally which can be equated to preliminary decrees  

granted by courts, and the final award made by the arbitrator, after detailed  

accounting  etc.  could  be  compared  to  the  final  decree  by  courts.  It  is  

therefore contended that there is no impediment for the parties to mortgage  

suits being referred to arbitration under section 8 of the Act.  If the three  

issues referred by the appellant are the only disputes, it may be possible to  

refer them to arbitration. But a mortgage suit is not only about determination  

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of the existence of the mortgage or determination of the amount due. It is  

about enforcement of the mortgage with reference to an immovable property  

and  adjudicating  upon  the  rights  and  obligations  of  several  classes  of  

persons (referred to in para 27 (ii) above), who have the right to participate  

in the proceedings relating to the enforcement of the mortgage, vis-à-vis the  

mortgagor  and  mortgagee.  Even  if  some of  the  issues  or  questions  in  a  

mortgage suit (as pointed out by the appellant) are arbitrable or could be  

decided by a private forum, the issues in a mortgage suit cannot be divided.  

The following observations of this court in a somewhat different context, in  

Sukanya Holdings (P) Ltd. v.  Jayesh H.Pandya – 2003 (5)  SCC 531 are  

relevant:  

“The  next  question  which  requires  consideration is--even  if  there  is  no  provision for partly referring the dispute to arbitration,  whether  such a  course is possible under Section 8 of the Act? In our view, it would be  difficult to give an interpretation to Section 8 under which bifurcation of  the cause of action that is to say the subject matter of the suit or in some  cases  bifurcation  of  the  suit  between  parties  who  are  parties  to  the  arbitration agreement and others is possible. This would be laying down a  totally new procedure not contemplated under the Act. If bifurcation of the  subject matter of a suit was contemplated, the legislature would have used  appropriate  language  to  permit  such  a  course.  Since  there  is  no  such  indication in the language, it follows that bifurcation of the subject matter  of an action brought before a judicial authority is not allowed.”

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Conclusion

30. Having regard to our finding on question (iv) it has to be held that the  

suit being one for enforcement of a mortgage by sale, it should be tried by  

the court and not by an arbitral tribunal. Therefore we uphold the dismissal  

of the application under section 8 of the Act, though for different reasons.  

The appeal  is  accordingly dismissed.  We however make it  clear  that  we  

have not recorded any finding, nor expressed any opinion, on the merits of  

the claims and disputes in the suit.

…………………………..J. (R V Raveendran)

New Delhi; …………………………J. April 15, 2011. (J M Panchal)

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