Disputes Relating To Enforcement Or Redemption Of Mortgage Not Arbitrable: Bombay High Court

The Court was hearing an application filed under Section 8 of the Arbitration and Conciliation Act, 1996, in a suit instituted by a financial institution for the enforcement of mortgage and recovery of dues from a borrower.

The borrowers had sought reference of the dispute to arbitration on the ground that the loan and mortgage agreements contained an arbitration clause.

A Bench comprising Justice Sandeep V. Marne, while rejecting the plea, held that “enforcement of mortgage being a right in rem, the same is not arbitrable since the plaintiff is seeking enforcement of mortgage, the dispute involved in the suit cannot be referred to arbitration.”

The applicants were represented by Advocate Savita Nangare, while the respondent financial institution was represented by Advocates Nausher Kohli.

Background

The suit was filed by a financial institution seeking recovery of over ₹17 crores and enforcement of mortgage rights over unsold flats in a redevelopment project in Mumbai. The loans were extended to a partnership firm engaged as a developer under a development agreement with a housing society.

The developer-borrower had executed multiple loan agreements and corresponding indentures of mortgage in favour of the financial institution to secure the loan facilities.

Upon default in repayment, the lender issued recall notices and filed a civil suit seeking recovery of dues, enforcement of the mortgage, and restraint orders against the developers and the housing society from transferring or encumbering the project flats.

The defendants, however, moved an application under Section 8 of the Arbitration and Conciliation Act, contending that the loan agreements and indentures of mortgage contained arbitration clauses mandating resolution of disputes through arbitration.

The financial institution, while opposing the plea, relied on precedents, contending that the enforcement or redemption of mortgage, being a right in rem, cannot be settled through arbitration.

Court’s Observation

The Bombay High Court analysed the scope of Section 8 of the Arbitration Act and held that “the issue of arbitrability of dispute relating to mortgage is a transfer of right in rem and that a suit for enforcement of mortgage will have to be decided by Courts of law and not by Arbitral Tribunal.”

The Court further stated that the law laid down in Booz Allen and Hamilton Inc. Versus. SBI Home Finance Limited continues to hold the field and has not been diluted by Vidya Drolia Versus. Durga Trading Corporation, which reaffirmed that “a suit for foreclosure or redemption of mortgage property can be dealt with by public forum and not by a private forum.”

While examining the question of whether disputes relating to mortgage enforcement could be referred to arbitration, the Court observed that “the Apex Court in Vidya Drolia has held that claims of banks and financial institutions are covered under the DRT and cannot be held to be arbitrable.”

The Court also took note of the applicant’s reliance on Aditya Birla Finance Ltd. to argue that the issues of arbitrability under Sections 8 and 11 of the Arbitration and Conciliation Act, 1996, should be left for the arbitrator to decide. Rejecting this contention, the Bench clarified that while Section 8 requires the referral court to look into the prima facie existence of a valid arbitration agreement, Section 11 confines the court’s jurisdiction to the examination of the existence of an arbitration agreement.

The Bench clarified that “although the object and purpose behind Sections 8 and 11 is to compel parties to abide by their contractual understanding, the scope of power of referral courts on the said provisions is intended to be different.”

Addressing the contention regarding the presence of one of the defendants, a society that was not a party to the arbitration agreement, the Court observed that the involvement of a third party, whose rights are directly affected by the subject matter of the dispute, takes the matter outside the scope of arbitration.

Conclusion

Consequently, holding that “the dispute involved in the suit cannot be referred to arbitration”, the Bombay High Court rejected and dismissed the application.

Cause Title: M/s Divya Enterprise and Others v. Capri Global Capital Ltd. (Neutral Citation: 2025:BHC-OS:18363)

Appearances

Appellants: Advocates Savita Nangare, Vinod Nagula and Disha Shah. 

Respondents: Advocates Nausher Kohli, Shikha Ginodia, Gaurav Suryawanshi, Simran and others. 

Click here to read/download Judgment