Court affirms that arbitration clause in loan agreement cannot be invoked for unrelated civil suit on damages
In a notable judgment passed by the Himachal Pradesh High Court, Justice Ajay Mohan Goel upheld the dismissal of an application by Kotak Mahindra Bank Ltd. to refer a civil suit to arbitration. The case involved a suit filed by Jaimal Singh against the bank for damages due to mental pain and harassment over the non-issuance of a "No Objection Certificate" (NOC) after loan clearance.
The judgment, delivered on November 28, 2025, reinforced the legal principle that an arbitration clause within a loan agreement cannot be invoked for disputes that are unrelated to the performance or terms of the agreement itself. The civil suit in question, seeking damages of Rs. 2,00,000, stemmed from the bank's failure to issue an NOC after the complete repayment of two separate loans by the plaintiff.
The legal battle began when Kotak Mahindra Bank sought to leverage the arbitration clause from the original loan agreement, which stipulated that disputes arising during the subsistence of the agreement should be settled through arbitration. However, both the Trial Court and the Appellate Court had previously dismissed the bank's application, determining that the suit for damages was not directly connected to the loan agreement, which had been fulfilled upon loan repayment.
Justice Goel, in his oral judgment, noted that the arbitration clause could not be applied as the civil suit's cause of action was independent of the loan agreement. He highlighted that the damages claimed were due to harassment and not due to any dispute over the loan's terms or its execution. Furthermore, the court observed that the arbitration clause, as per the agreement, was not applicable since the agreement had been exhausted once the loan was fully repaid.
The judgment also referred to Section 12(5) of the Arbitration and Conciliation Act, as amended in 2016, which further limited the applicability of the arbitration clause. The court affirmed the decisions of the lower courts, emphasizing that the orders did not warrant interference as the suit's subject matter stood isolated from the loan agreement's contents.
The case underscored the importance of contextualizing the applicability of arbitration clauses, especially in instances where the disputes extend beyond the immediate terms of contractual agreements. The ruling serves as a precedent for similar disputes, clarifying the boundaries within which arbitration can be invoked.
Bottom Line:
Arbitration Clause - A civil suit for damages unrelated to the loan agreement cannot be referred to arbitration based solely on the arbitration clause within the original loan agreement. Arbitration clause cannot be invoked for matters disconnected from the performance or disputes of the agreement.
Statutory provision(s): Arbitration and Conciliation Act, 1996 Section 8(5), Section 12(5)
Kotak Mahindra Bank Ltd. v. Jaimal Singh, (Himachal Pradesh) : Law Finder Doc Id # 2829859
