In Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., honourable Supreme Court of India had laid down the law that arbitration proceedings cannot be invoked in cases where enforcement of mortgage right is in question as it is a right in rem and it has to be dealt with by a Court of Law even though arbitration clause is incorporated in the mortgage deed. 'In Rem' in reference to a lawsuit against a property is the determination of rights in the property against the whole world. This is usually quoted as 'right in rem' which is the opposite of 'right in personam'. More specifically, 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 This post under the section 'Law Questions' reveals the interesting twist of law in statute to cope with true sense/logic of law.
|Enforcement of Mortgage can only be through Court|
A mortgage is a transfer of right in rem. The question was whether for enforcement of the mortgage right arbitration proceedings can be resorted to in the case of having an arbitration clause in the mortgage agreement. This question was dealt with by apex Court in the above decision and answered that it should be dealt with by Court of law only. As a mortgage is a transfer of 'right in rem', an action in rem has to be necessarily made in a Court of law other than an Arbitration Tribunal or before Arbitrator as a Court of law has wide powers when compared to Arbitration proceedings. Main reasoning for answering the question can be found in the above judgement and for the sake of reader's convenience the points are stated below:
1) Type of decrees and conduct of case
Order 34 of the Civil Procedure Code provides for preliminary and final decrees to satisfy the substantive rights of mortgagees with reference to their mortgage security. However in an Arbitration proceeding, the matter of preliminary decree and final decrees do not arise. Moreover the conduct of case involves thorough scrutiny and appreciation of evidence in detail much different to proceedings before Arbitrator.
2) Principle of 'Right in Rem' met with in Court proceedings
A decree for sale of a mortgaged property 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). Rule (1) of Order 34 of Civil procedure Code 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 aim of this rule is avoiding multiplicity of suits and to 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 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. Moreover, in Section 47 Explanation 2 it is stated that a purchaser of property at a sale in execution of a decree shall be deemed to be a party to the suit in which the decree is passed and can contest against the decree. This power is not available in Arbitration proceedings.
3) Accounting of money due and Re-transfer or sale of mortgaged property
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 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 arbitration tribunal will not be able to do so.
4) Subrogation right of mortgage approved and other powers
Where in a suit for sale or 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 could provide for adjudication of the respective rights and liabilities of the parties to the suit in a manner and form 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 arbitration tribunal will not be able to do.
5) Enlargement of time
The court has the power, 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 Arbitration Tribunal will have no such power.
The appellant contended that the aspects of valid mortgage in favour of SBI, amount due to SBI and the question of eviction can be decided upon by Arbitrator. It was also 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 arbitration 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. But the apex Court was not inclined to accept the point of appellant. A mortgage suit is not only about determination 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 who have the right to participate in the proceedings relating to the enforcement of the mortgage, vis-a`-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 and it has to be decided as a whole. Therefore, a suit for sale, foreclosure or redemption of a mortgaged property, should only be tried by a public forum, and not by an arbitration tribunal. Consequently, it follows that the court where the mortgage suit is pending, should not refer the parties to arbitration and the ratio decidendi (reasoning for the decision) was that a suit for enforcement of a mortgage by sale of mortgaged property is an action in rem and for the enforcement of a right in rem. The above decision was followed recently by Kerala High Court in India Cements Capital Ltd. vs. William and Others in C.R.P 116/2014.