Enforcement of Mortgage and Related Reliefs Constitutes a Right in Rem, Not Arbitrable: Bombay High Court
Isabella Mariam
The Bombay High Court, Single Bench of Justice Sandeep V. Marne held that disputes involving enforcement of a mortgage constitute a right in rem and therefore cannot be referred to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996. The Court observed that a civil suit is the proper forum for enforcing such rights and dismissed the developers’ plea seeking reference of the dispute to arbitration. The case arose from a financial institution’s suit to recover dues and enforce its mortgage over a redevelopment project, where the Court concluded that mortgage enforcement necessarily falls within civil jurisdiction.
The case arose from a suit filed by a financial institution seeking recovery of outstanding dues amounting to over Rs.17 crore and enforcement of mortgage rights against a group of developers engaged in the redevelopment of a housing society property in Mumbai. The developers were appointed as contractors under a Development Agreement executed with the cooperative housing society, which was later supplemented by a revised agreement. To finance the project, the developers obtained multiple loan facilities from the plaintiff, secured by mortgages over certain project units and receivables.
When repayment obligations were allegedly not met and several cheques were dishonoured, the plaintiff issued recall notices, followed by notices under Section 13(2) of the SARFAESI Act, declaring the loan accounts as non-performing assets. The financial institution then instituted a civil suit seeking recovery of the dues, declaration of its mortgage as valid and subsisting, and enforcement of its charge over the mortgaged units. The suit also included prayers for injunctions restraining further sale or transfer of the project flats without the plaintiff’s consent.
The developers filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, seeking reference of the dispute to arbitration. They contended that the loan agreements and indentures of mortgage contained arbitration clauses and that the dispute was commercial and therefore arbitrable. The financial institution opposed the application, arguing that the suit sought enforcement of a mortgage, which constituted a right in rem, and that such disputes could only be adjudicated by a civil court.
Both sides relied on judicial precedents including Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., Vidya Drolia v. Durga Trading Corporation, and M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd.. The Court examined whether the subject matter of the suit fell within the scope of the arbitration agreement and whether enforcement of mortgage rights was arbitrable
The Court recorded that “a judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement, shall refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists.” However, the Court clarified that reference under Section 8 can be made only if the matter in an action is also the subject of an arbitration agreement.
Addressing the issue of arbitrability, the Court referred extensively to Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., where the Supreme Court had held that “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 Court noted that “a mortgage is a transfer of a right in rem and a mortgage suit for sale of the mortgaged property is an action in rem for enforcement of that right.”
The Court further quoted Vidya Drolia v. Durga Trading Corporation, where it was held that “a suit for foreclosure or redemption of mortgage property can be dealt with by a public forum and not by a private forum.” Justice Marne recorded that although Vidya Drolia clarified the concept of subordinate rights in personam being arbitrable, it did not depart from Booz Allen concerning mortgage enforcement.
On the defendants’ reliance on M.D. Frozen Foods Exports Pvt. Ltd. v. Hero Fincorp Ltd., the Court noted that the decision had been clarified in Vidya Drolia, holding that “claims of banks and financial institutions covered under the DRT Act are non-arbitrable as the legislation has overwritten the contractual right to arbitration.” The Court observed that “interpretation of the ratio in M.D. Frozen Foods by the Apex Court in Vidya Drolia would be binding.”
Justice Marne rejected the defendants’ contention that the Court lacked power to examine arbitrability under Section 8, noting that the scope of inquiry under Section 8 was broader than under Section 11. Referring to Interplay Between Arbitration Agreements under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899, In Re, the Court stated that “Section 8 requires the referral court to look into prima facie existence of valid arbitration agreement, whereas Section 11 confines the court’s jurisdiction to examination of existence of arbitration agreement.” Therefore, under Section 8, courts are competent to determine whether the dispute itself is arbitrable.
The Court also cited Emaar MGF Land Ltd. v. Aftab Singh, holding that “the enforcement of a mortgage has been held to be a right in rem for which proceedings in arbitration would not be maintainable.” It further observed that the 2015 amendment to Section 8 did not alter the principle that certain disputes, by their nature or by statutory implication, are reserved for public fora.
Addressing Defendant No. 5’s role, the Court noted that the cooperative society was a necessary party as the plaintiff sought injunctions and declaratory reliefs directly against it. The judgment recorded that “Plaintiff is seeking a restraint order against the Society from issuing any NOCs or consent letters in respect of the flats/units in the building. This relief cannot be sought in arbitration proceedings between the Plaintiffs and Defendant Nos. 1 to 4.” Thus, the Court held that the presence of the society precluded reference to arbitration.
Justice Marne also considered the defendants’ plea for separate arbitrations against different parties, relying on P.R. Shah Shares and Brokers Pvt. Ltd. v. B.H.H. Securities Pvt. Ltd. and Cloro Controls India Pvt. Ltd. v. Severn Water Purification Inc., but rejected it, observing that “as of now there is no arbitration between Defendant No. 5-Society and Defendant Nos. 1 to 4” and therefore, no question of consolidation arose.
Justice Marne recorded that “the conspectus of the above discussion is that enforcement of mortgage being a right in rem, the same is not arbitrable.” Consequently, the Court rejected the defendants’ application seeking reference to arbitration.
“Since the Plaintiff is seeking enforcement of mortgage, the dispute involved in the suit cannot be referred to arbitration.” Justice Marne also stated that the inclusion of Defendant No. 5-Society, against whom specific injunctive reliefs were sought, further rendered the dispute non-arbitrable, as “this relief cannot be sought in arbitration proceedings. I therefore do not find any merits in the Application preferred by Defendants No. 1 to 4. The Interim Application is accordingly rejected.”
Advocates Representing the Parties:
For the Plaintiff: Mr. Nausher Kohli with Ms. Shikha Ginodia, Mr. Gaurav Suryawanshi, and Ms. Simran K. instructed by M/s ANM Global.
For the Defendants: Ms. Savita Nangare with Mr. Vinod Nagula and Ms. Disha Shah instructed by M/s Law Focus, Mr. Shanay Shah with Ms. Riya Thakkar instructed by Mr. Tushar Goradia.
Case Title: Capri Global Capital Limited v. M/s Divya Enterprise and Others
Neutral Citation: 2025: BHC-OS:18363
Case Number: Interim Application (L) No. 25700 of 2025 in Commercial Suit (L) No. 23360 of 2025
Bench: Justice Sandeep V. Marne
