The Bombay High Court has held that a mortgagor who discharges a borrower's debt to secured lenders cannot invoke the arbitration clause contained in the loan agreement between the lenders and the borrower, absent an assignment of arbitration rights or a statutory basis for subrogation extending to the arbitration agreement. The Court dismissed an application under Section 11 of the Arbitration and Conciliation Act, 1996, finding that the applicant failed to establish even a prima facie derivative right to the lenders' arbitration clause.
Background & Facts
The Dispute
The applicant, Ashapura Developers, sought appointment of a sole arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 to adjudicate disputes arising from a Loan Agreement dated 27 August 2020. The respondent, Ashapura Options Private Limited, had borrowed Rs. 36,00,00,000 from Blacksoil Capital Private Limited and Allnet Financial Services Private Limited (collectively, the "Lenders"). The applicant provided its properties as security for this loan by executing a Mortgage Deed dated 27 August 2020. An Escrow Agreement was executed on 20 October 2020 for depositing receivables from the mortgaged properties. The applicant claimed it paid the entire loan liability on behalf of the respondent after the respondent defaulted and was admitted to the corporate insolvency resolution process, and thereby became subrogated to the lenders' rights, including the right to invoke arbitration under Clause 36 of the Loan Agreement.
Key Facts
- 27 August 2020: Loan Agreement executed between respondent (borrower) and Lenders for Rs. 36 crores; Mortgage Deed executed by applicant as security
- 20 October 2020: Escrow Agreement executed for depositing receivables from mortgaged properties
- 2021: Respondent failed to make repayments as required
- 2022: Lenders filed Commercial Suit No. 102 of 2022 for enforcement of mortgage and recovery
- 15 December 2022: Parties entered into First Consent Terms; applicant and respondent agreed to joint and several liability
- 30 March 2023: Respondent admitted to corporate insolvency resolution process under IBC
- 2023: Lenders filed Commercial Execution Application No. 24828 of 2023 against applicant and respondent; moratorium under Section 14 IBC applied to respondent, so lenders proceeded against applicant's properties
- 15-16 February 2024: Applicant made one-time settlement offer to Lenders, which was accepted
- 30 April 2024: Blacksoil issued letter acknowledging repayment
- 20 June 2024: Allnet issued conditional NOC for repayment of settlement amount
- 29 September 2025: Bombay High Court recorded settlement between parties in Comm. Exe. App. (L) No. 24828 of 2023
- 14 April 2024: Applicant issued demand notice to respondent for repayment of amounts paid on its behalf
- 13 May 2026: Applicant sent invocation notice to respondent under Clause 36 of Loan Agreement
- 10 June 2026: Respondent replied disputing the claim
- 2026: Applicant filed present Commercial Arbitration Application (L) No. 21172 of 2026 under Section 11
Procedural History
- 13 May 2026: Invocation notice issued by applicant to respondent
- 10 June 2026: Respondent's reply disputing claim
- 2026: Commercial Arbitration Application (L) No. 21172 of 2026 filed before Bombay High Court (Commercial Division)
- 3 September 2026: Matter reserved for judgment
- 7 September 2026: Judgment pronounced
The Parties' Positions
Applicant's case: The arbitration clause in Clause 36 of the Loan Agreement covers disputes arising from the Finance Documents. The applicant, having paid the lenders' dues, stepped into the lenders' shoes by way of subrogation and acquired their right to invoke arbitration. The Mortgage Deed operates as a guarantee, giving rise to subrogation rights under Sections 141 of the Indian Contract Act, 1872 and Sections 91-92 of the Transfer of Property Act, 1882. Post-2015 amendment, the court's role under Section 11 is limited to examining existence of an arbitration agreement; disputed questions of fact should be left to the arbitral tribunal (relying on Duro Felguera, Interplay, A.P. Power Generation).
Respondent's case: The applicant is only a mortgagor, not a "Lender" or "Obligor" under Clause 36. The arbitration clause permits only Lenders to invoke arbitration against Obligors. No arbitration agreement exists between applicant and respondent. The Mortgage Deed contains no arbitration clause. Subrogation under Section 141 Contract Act is available only to guarantors/sureties, not mortgagors. Section 91 TPA excludes a mortgagor redeeming its own property. No assignment of arbitration rights occurred. The Loan Agreement stands discharged per no-dues letters and court order. Applicant previously pursued pre-institution mediation (Commercial Dispute No. 01 of 2026) on same cause of action, barring fresh proceedings under Order 23 Rule 1 CPC (Rajiv Gaddh).
Relief Sought
The applicant sought appointment of a sole arbitrator to decide disputes and differences arising from the Loan Agreement and Finance Documents, specifically recovery of amounts paid to the Lenders on the respondent's behalf.
The Legal Issue
Whether a mortgagor who is not a party to a loan agreement's arbitration clause can invoke that clause against the borrower by claiming subrogation to the lenders' rights after discharging the borrower's debt, where the arbitration clause expressly limits invocation to "claims, disputes or rights, of the Lenders against the Obligors."
Arguments Presented
For the Applicant
Mr. Kevic Setalvad, Senior Advocate, submitted that Clause 36 of the Loan Agreement contains a valid arbitration agreement covering disputes arising from the Finance Documents. The applicant, having discharged the respondent's liability to the Lenders, acquired the lenders' rights by subrogation. The Mortgage Deed, read with Clauses E, F, and N, created an obligation akin to a guarantee. Reliance was placed on State Bank of India v. Smt. Kusum Vallabhdas Thakkar (1991 SCC OnLine Guj 14), Anuj Jain, IRP for Jaypee Infratech v. Axis Bank Ltd. ((2020) 8 SCC 401), and Rajagopala Iyer v. S. Ramachandra Iyer ((1942) SCC OnLine MAD 41) for the proposition that a third-party security provider can be subrogated to the creditor's rights. The applicant argued that post-2015 amendment, the court's jurisdiction under Section 11(6-A) is confined to a prima facie examination of the existence of an arbitration agreement, citing Duro Felguera v. Gangavaram Port Ltd. ((2017) 9 SCC 729), Interplay between Arbitration Agreements under Arbitration Act, 1996 & Stamp Act, 1899, In re ((2024) 6 SCC 1), and A.P. Power Generation Corp. Ltd. v. Tecpro Systems Ltd. ((2026) 3 SCC 491). The detailed enquiry into whether a non-signatory is bound should be left to the arbitral tribunal per Cox & Kings Ltd. v. SAP India Pvt. Ltd. ((2024) 4 SCC 1).
For the Respondent
Mr. Mayur Khandeparkar submitted that the applicant is described only as "Mortgagor" in the Loan Agreement and Mortgage Deed, not as a "Lender" or "Obligor." Clause 36.1 refers to "claims, disputes or rights, of the Lenders against the Obligors" and Clause 36.2 provides that "Such claims shall be referred by Lenders to arbitration." The applicant is neither. The Mortgage Deed contains no arbitration clause. Subrogation under Section 141 Contract Act is unavailable to a mortgagor. Section 91 TPA excludes a mortgagor redeeming its own property. No assignment of arbitration rights was shown. The Loan Agreement stands discharged per Blacksoil's letter (30 April 2024), Allnet's NOC (20 June 2024), and the court's order (29 September 2025). The applicant previously initiated pre-institution mediation (Commercial Dispute No. 01 of 2026) on the same cause of action, constituting abuse of process per Rajiv Gaddh v. Subodh Parkash (2026 SCC OnLine SC 507). Reliance was placed on S.N. Prasad, Hitek Industries (Bihar) Ltd. v. Monnet Finance Ltd. ((2011) 1 SCC 320) (arbitration agreement with one guarantor does not extend to another), Ketan Champaklal Divecha v. DGS Township Pvt. Ltd. (Bom HC, 2 January 2024) (arbitration clause must be read as drafted), and Hindustan Petroleum Corp. Ltd. v. BCL Secure Premises Pvt. Ltd. (2025 INSC 1401) (mere commercial connection insufficient; referral court must examine prima facie whether applicant is a veritable party).
The Court's Analysis
The Court framed the core question: not merely whether an arbitration clause exists, but whether the applicant can invoke it against the respondent. Clause 36.1 expressly refers to "claims, disputes or rights, of the Lenders against the Obligors." The applicant is admittedly neither a Lender nor an Obligor.
The Court acknowledged the applicant's reliance on Duro Felguera, Interplay, and A.P. Power Generation for the proposition that the Section 11 court's role is limited to a prima facie examination of the existence of an arbitration agreement. However, it emphasized the limiting principle from Hindustan Petroleum (2025 INSC 1401):
"This does not mean that where the Referral Court finds prima facie a party is not a veritable party still the matter is left to the Arbitral Tribunal. To hold so, would relegate the Referral Court to the status of a monotonous automation. Further, to countenance such an extreme proposition would lead to disastrous consequences, where absolute strangers could walk into the Referral Court and contend that the matter has to perforce go to the Arbitral Tribunal for a decision on the veritable nature of the party. We are not prepared to accept such an extreme proposition."
The Court held that a real prima facie examination is required. The applicant must show a sufficient basis for treating itself as a veritable party or derivative claimant.
On subrogation, the Court referred to Cox & Kings (paragraph 140), which identifies assignment, subrogation, and novation as typical scenarios where a person can claim through or under a party, but clarifies that "mere legal or commercial connection is not sufficient for a non-signatory to claim through or under a signatory party." The non-signatory must succeed to the interest of the signatory and does not get an independent right.
The Court examined Economic Transport Organisation v. Charan Spinning Mills ((2010) 4 SCC 114), which explains that equitable subrogation may arise by operation of law where an insurer fully pays the insured's claim, but "merely because one person has made payment which is connected with the liability of another person, it does not mean that all the rights of that other person have come to the person making the payment. There has to be some legal basis for the derivative right which is being claimed."
The applicant's reliance on Kusum Vallabhdas Thakkar and Jaypee Infratech was considered. While a third-party mortgage may have the character of a guarantee, "it does not follow that the arbitration clause contained in a separate agreement between the Lenders and the Obligors became an arbitration agreement between the Applicant and the Respondent." Arbitration is based on consent; an equitable claim cannot enlarge an arbitration agreement.
The Court found S.N. Prasad directly relevant: an arbitration agreement between lender, borrower, and one guarantor cannot be deemed an agreement with another guarantor not party to it. The applicant's connection with the transaction does not make it a party to the arbitration agreement.
Clause 36.1's wording - "claims, disputes or rights, of the Lenders against the Obligors" - identifies the persons between whom arbitration is contemplated. The applicant must show it claims through or under a Lender. On the material, no assignment of the arbitration right was shown. The no-dues letters and court order recording settlement indicate the original obligations were discharged, and no document shows the lenders retained and transferred the right to invoke Clause 36.
The Court also noted that subrogation under Section 91 TPA does not assist a mortgagor redeeming its own property. Even assuming some equitable right arose, the applicant must show a corresponding right to invoke the arbitration agreement - which it failed to do.
The Court distinguished Rahul Cargo (where the insurer had established valid subrogation) and Ketan Champaklal Divecha (where the clause's drafting was determinative). It clarified that a non-signatory may invoke arbitration in an appropriate case, but this applicant did not show the required derivative legal relationship.
The Court declined to decide the abuse of process objection (based on prior mediation proceedings) as the application failed on the primary ground.
The Verdict
The Court dismissed the Section 11 application seeking appointment of a sole arbitrator. It held that the applicant failed to establish even a prima facie basis that it is a signatory to, or a person claiming through or under a signatory of, the arbitration agreement in Clause 36. The fact that the applicant paid the lenders' dues is insufficient to establish derivative arbitration rights. The Court clarified that it expressed no opinion on the applicant's substantive rights, claims, or remedies, which are kept open. No order as to costs was made.
What This Means For Similar Cases
Arbitration Clause Wording Is Determinative
- Practitioners must scrutinize the precise language of arbitration clauses: Clause 36.1's limitation to "claims, disputes or rights, of the Lenders against the Obligors" excluded the mortgagor.
- Courts will enforce the contractual arrangement as drafted; they will not extend arbitration rights to persons outside the designated classes.
- Drafting takeaway: If parties intend security providers to have arbitration rights, the clause must expressly include them.
Subrogation Does Not Automatically Transfer Arbitration Rights
- Payment of another's debt, even if giving rise to equitable subrogation for recovery, does not automatically confer the creditor's procedural rights (including arbitration).
- A derivative claimant must show a legal basis for succeeding to the specific arbitration right - assignment, novation, or statutory subrogation extending to the arbitration agreement.
- Practice point: Security providers should negotiate express assignment of arbitration rights or a direct arbitration agreement with the borrower.
Referral Court Must Conduct Real Prima Facie Scrutiny
- Post-Hindustan Petroleum, Section 11 courts cannot mechanically refer every non-signatory's application to arbitration.
- Where the applicant's own documents show it falls outside the arbitration clause's designated parties and no derivative basis is prima facie established, dismissal is appropriate.
- Litigation strategy: Non-signatories seeking arbitration must lead concrete evidence of assignment, novation, or statutory subrogation covering the arbitration agreement - not merely commercial connection or equitable claims.
Mortgagors Redeeming Own Property Lack Statutory Subrogation Under Section 91 TPA
- Section 91 Transfer of Property Act, 1882 excludes a mortgagor who redeems its own property from claiming subrogation.
- This statutory bar reinforces that a mortgagor's payment discharges the mortgage but does not transfer the mortgagee's contractual rights against the borrower.
- Advisory: Mortgagors should secure contractual indemnity and arbitration clauses directly with the borrower at the outset.
