Isabella Mariam

The High Court of Bombay Single Bench of Justice Somasekhar Sundaresan held that the arbitration agreement invoked by the applicant was inapplicable to the nature of dispute raised. The Court directed that the application under Section 11 of the Arbitration and Conciliation Act, 1996, seeking appointment of an arbitrator, be dismissed. The Court held that the dispute was not amenable to arbitration under Clause 11.7 of the Master Facility Agreement, as it did not fall within the limited scope of that arbitration clause.

The application under Section 11 of the Arbitration and Conciliation Act, 1996, was filed by the applicant, a borrower, seeking appointment of an arbitrator in relation to disputes with Kotak Mahindra Bank Limited arising under a Master Facility Agreement dated December 18, 2018. The arbitration clause in question, contained in Clause 11.7 of the Agreement, was at the center of the adjudication.

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The dispute arose when the applicant issued an invocation notice dated May 13, 2024, alleging that the respondent bank had charged penal and additional interest rates not stipulated in the agreement. The specific grievances included a penal interest rate of 36% per annum for delay in execution of security documents and an additional 3% per annum for non-renewal of the loan facility. Additionally, the applicant alleged that its bank account was blocked arbitrarily between February 22 and February 25, 2022. These issues were said to stem from the manner in which the loan agreement was operated.

The respondent bank contested the maintainability of the arbitration application, asserting that there was no valid arbitration agreement in existence concerning the dispute raised. It relied upon the language of Clause 11.7, arguing that arbitration was only permissible when the monetary value of the dispute fell below the pecuniary jurisdiction threshold of the Debts Recovery Tribunal (DRT), which under Section 1(4) of the Recovery of Debts and Bankruptcy Act, 1993, is Rs. 20 lakh.

The respondent pointed out that, as per paragraph 10 of the application, the monetary claim exceeded Rs. 1 crore. Therefore, it submitted, the dispute was beyond the scope of the arbitration clause and should not be referred to arbitration.

Clause 11.7, inter alia, provided for exclusive jurisdiction of the courts and tribunals of the branch office’s location for all disputes arising out of the agreement, but also permitted the bank to initiate proceedings in any other forum with competent jurisdiction. The key proviso stated that disputes below the pecuniary jurisdiction of the DRT were to be referred to arbitration by a sole arbitrator appointed by the bank.

The Court analyzed whether the pecuniary limitation applied uniformly or was restricted to certain classes of disputes. It examined the substantive jurisdiction of the DRT, which under Section 17(1) of the Recovery of Debts and Bankruptcy Act extends only to applications by banks and financial institutions for recovery of debts. The Court noted that this clause could only be attracted in recovery-related claims initiated by banks.

Accordingly, the Court determined that the current dispute, which concerned a borrower's challenge to penal interest charged by the bank, did not fall within the jurisdiction of the DRT. As such, the fallback arbitration clause was also inapplicable. The arbitration agreement, therefore, did not extend to disputes raised by borrowers alleging contractual violations or wrongful financial practices.

The Court further noted the asymmetrical structure of Clause 11.7. It observed that the clause allowed only the bank to invoke arbitration, to appoint an arbitrator unilaterally, and to determine the seat of arbitration. However, it also acknowledged that parties were free under Section 7 of the Arbitration and Conciliation Act to contractually decide which types of disputes could be referred to arbitration. In this context, the agreement limited arbitration only to bank-initiated recovery claims falling below the DRT threshold.

The Court stated “In my opinion, the simplistic reference by the Respondent to the pecuniary jurisdiction threshold and comparing that with the size of the dispute for which arbitration is invoked, is misplaced.”

The judgment further recorded: “When one adopts in a clause, the pecuniary (quantitative) jurisdiction of a forum, one must also examine the substantive jurisdiction of that forum.”

The Court interpreted Section 17(1) of the RDB Act, observing: “Even a plain reading of the aforesaid provision would show that the jurisdiction of the DRT is only to entertain applications from banks for recovery of debts.”

It continued: “If the amount sought to be recovered by the Respondent were to be above Rs. 20 lakh, there would be no scope for arbitration at all under Clause 11.7 of the Agreement.”

Addressing the scope of the arbitration clause, the Court recorded: “The arbitration agreement is explicit in its scope – it is only meant to cover disputes in the nature of recovery of debt of a size of below Rs. 20 lakh.”

It observed further: “Since the genus of the dispute necessary for the arbitration agreement to exist is a dispute that would otherwise be amenable to the substantive jurisdiction of the DRT, the threshold of pecuniary jurisdiction is a secondary feature.”

Considering the asymmetrical structure of the clause, the Court stated: “Clause 11.7 is extremely asymmetrical and one-sided – something that would push a Court more towards rejecting it rather than enforcing it on the premise of absence of mutuality.”

Finally, while discussing parties’ strategic positions in similar cases, the Court noted: “It is necessary to interpret the actual scope of the arbitration agreement, because in such proceedings, parties are prone to taking a stance to further what would serve their interests.”

The Court held: “The dispute in question for which arbitration is sought to be invoked is one of allegedly abusive application of penal interest rates in conflict with the Agreement, where the person seeking to initiate arbitration is the Applicant.”

It recorded that: “Such a dispute is not amenable to the jurisdiction of the DRT, and therefore, the fallback of arbitration contained in Clause 11.7 of the Agreement is not applicable.”

It concluded that: “Consequently, this Application cannot be allowed. The Applicant shall have liberty to pursue appropriate proceedings in such other forum as advised.”

On costs, the Court recorded: “This Application raised an important arguable question of law when interpreting the Agreement. Therefore, there shall be no order as to costs despite the Application being disallowed.”

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It further clarified: “The time taken in pursuit of these proceedings is time spent bona fide on an important question arising out of the Agreement and should not count in computation of limitation in any other proceedings that the Applicant may be advised to institute.”

Finally, it directed: “All actions required to be taken pursuant to this order shall be taken upon receipt of a downloaded copy as available on this Court’s website.”

Advocates Representing the Parties

For the Petitioners: Mr. Rahul Totala, Advocate, a/w Chaitanya Mendon, Mitesh Jain i/b Swapnil Lohiya

For the Respondents: Mr. Nikhil Sakhardande, Advocate, a/w Paras Parekh, Abhineet Sharma & Kandarp Trivedi i/b RHP Partners

Case Title : Samruddhi Industries Ltd. Through Its Authorised Signatory Mr Ramakant Narayan Malu v. Kotak Mahindra Bank Limited

Neutral Citation: 2025:BHC-OS:8912

Case Number: Arbitration Application No. 35 of 2025

Bench: Justice Somasekhar Sundaresan

[Read/Download order]