In a recent judgment, the Rajasthan High Court held that a prior notice under Section 21 of the Arbitration and Conciliation Act, 1996 is not mandatory if the other party was already aware of the dispute. The Court emphasized that the respondent, S.M.F.G. India Home Finance Company, was not taken by surprise when the arbitration clause was invoked by the applicants, Shekharchand Sacheti and Smt. Sudha Sacheti.
“It is inconceivable to suggest that the respondents were unaware of the dispute concerning the partition of the property,” the Court stated.
Justice Anoop Kumar Dhand delivered this ruling while allowing an application under Section 11 of the Arbitration Act, where the applicants sought the appointment of an arbitrator after a loan-related dispute.
The applicants had mortgaged 6,318 sq. ft. out of a 12,000 sq. ft. property. Following default in repayment, their account was classified as Non-Performing Asset (NPA), and SARFAESI proceedings were initiated. The entire property was taken into possession and auctioned without subdivision, prompting the applicants to seek legal remedies, including filing a civil suit for partition.
However, the respondents argued before the Civil Court that due to an arbitration clause in the loan agreement, civil proceedings were not maintainable. The Civil Court accepted this objection and returned the plaint. Subsequently, the applicants approached the High Court for appointment of an arbitrator.
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The respondents raised two key objections:
- The arbitration clause could not be invoked while SARFAESI proceedings were pending before the Debt Recovery Tribunal (DRT).
- No prior notice under Section 21 was given before invoking arbitration.
The Court rejected both objections:
“SARFAESI proceedings are enforcement mechanisms, while arbitration is an adjudicatory process. Both can proceed simultaneously,”
the Court noted, relying on the Supreme Court’s ruling in M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd.
As for the Section 21 notice, the Court observed:
“Since the respondents themselves moved the Civil Court under Sections 8 and 5 of the Act objecting to maintainability of the civil suit, it is clear they were fully aware of the dispute and arbitration clause.”
Accordingly, the High Court appointed former Acting Chief Justice Sabina as the sole arbitrator to resolve the dispute.
Title: Shekharchand Sacheti & Anr. v S.M.F.G. India Home Finance Company Limited & Anr.
