L&T Finance Limited vs Saraswathi Gouglath & Ors.

Heard Ms. K. Ramya, learned counsel for the Applicant; Mr. S. Ram Reddy, learned Counsel for Respondent Nos. 1 & 2; and Mr. C.V. Prabhu, learned Counsel representing M/s. Indus Law Firm appearing for Respondent No. 3. Despite service of notice, there was no representation on behalf of Respondent No. 4.

The present Arbitration Application is filed under Section 11 (6) of the Arbitration and Conciliation Act, 1996 (hereinafter "the Act") for the appointment of Arbitrator to adjudicate disputes between the parties.

The Applicant, L&T Finance Limited, is a Non-Banking Financial Company, registered under the Reserve Bank of India (RBI) for undertaking banking and financial services to its customers across India. Respondent No. 1 and 2 are the customers of the Applicant, who availed loan facility as borrower and co-borrower respectively vide Loan Account Numbers H112HL240904121217 and H112HL240904121217L, by entering into a Home Loan Agreement dated 19.09.2024. Respondent Nos. 1 & 2 had entered into an agreement with Respondent No. 3 for purchasing property i.e. Flat No. 302, H. No. 7-2-1735 & 7-2-1813/5/A/LN/302, Laxmi Nivas, Fathenagar, Sanath Nagar, Hyderabad – 500018 (hereinafter, “the schedule property”). In this regard, Respondent Nos. 1 & 2 approached the Applicant for availing a loan for “resale purchase” of the said property from Respondent No. 3. The Applicant was informed by Respondent Nos. 1 & 2 that Respondent No. 3 had obtained a secured loan against the schedule flat property from Respondent No. 4, i.e. Nido Home Finance Limited (formerly known as Edelweiss Housing Finance), a Non-Banking Financial Company.

The Applicant submits that Respondent Nos. 1 & 2 coordinated with Respondent No. 3 in obtaining a Foreclosure Letter from Respondent No. 4, which was submitted to the Applicant requesting to process their documentation for the loan. They represented that Respondent No. 3 would hand over the original documents pertaining to the schedule flat property after Respondent No. 4 receives the Foreclosure Amount. Relying on the promises and assurances of Respondent Nos. 1 & 2, the Applicant sanctioned the loan application and entered into a Home Loan Agreement dated 19.09.2024. The Applicant disbursed an amount of Rs. 50,09,449/- (i.e. Rs. 40,50,382/- vide cheque no. 252195 and Rs. 9,59,064/- vide cheque no. 252194), dated 20.09.2014, issued in the name of Respondent No. 3 as per the Foreclosure Letter dated 23.08.2024 of Respondent No. 4. Upon receipt of the loan amount, Respondent No. 3 cleared his loan.

The Applicant submits that the loan amount was sanctioned to Respondent Nos. 1 & 2 on the condition that they shall hand over the original documents of the schedule property to the Applicant. They are legally and contractually liable to do so. After availing the loan amount from the Applicant, Respondent No. 3 in collusion with Respondent Nos. 1 & 2 cleared the loan amount. Since the disbursal of loan amount, they have been making false excuses and breached the terms of the Agreement. They have caused wrongful loss to the Applicant in active collusion with Respondent No. 3.

The Applicant refers to Article 7.1(g) of the Agreement, whereby failure to furnish information/documents shall be construed as an “Event of Default”. In breach of material terms of the Agreement, the Applicant is entitled to terminate the Loan Agreement and demand repayment of entire loan amount along with interest. The Applicant issued a Legal Notice dated 21.05.2025, calling upon Respondent Nos. 1 & 2 to immediately hand over original documents within seven (7) days of the date of receipt of notice. Despite receipt of the said Notice, they failed to comply with the same. Subsequently, the Applicant issued a ‘Notice for Cancellation of Loan Agreement’ (hereinafter, “Termination Notice”) and ‘Arbitration Invocation Notice’ dated 26.06.2025 to Respondent Nos. 1 & 2 by invoking Article 7.2 of the Agreement and the termination clauses therein to terminate the Loan Agreement with immediate effect. Further, Article 12 of the Agreement was invoked to initiate arbitration proceedings, while exercising discretion under Article 12.5 to select Hyderabad as the venue for arbitration proceedings.

The Applicant and Respondent Nos. 1 & 2 entered into a Home Loan Agreement dated 19.09.2024 for the sanction of loan amount in respect of the schedule property. Article 12 of the said Agreement deals with “Arbitration”, it is relevant and extracted hereunder:

According to the Applicant, there are disputes between the Applicant and Respondent Nos. 1 & 2 with regard to the aforesaid Agreement dated 19.09.2024. Therefore, the Applicant issued Notice invoking arbitration dated 26.06.2025 addressed to Respondent Nos. 1 and 2, proposing the name of Sri T. Rakesh Singh (Advocate) to be appointed as the Sole Arbitrator to resolve the disputes. Despite receiving the said notice, Respondent Nos. 1 & 2 failed to reply. Therefore, the Applicants filed the present application.

Further, the Applicant submits that Respondent Nos. 3 & 4 are proper and necessary parties for the adjudication of disputes and claims arising out of the Loan Agreement. Respondent Nos. 1 & 2 in collusion with Respondent No. 3 are trying to alienate the schedule property to third parties in order to cause wrongful loss to the Applicant. By virtue of the transaction between the Applicant and Respondent Nos. 1 & 2, Respondent No. 3 cleared his loan availed from Respondent No. 4, and made an unjust enrichment at the cost of the Applicant. Respondent No. 4 by virtue of issuing a misleading Foreclosure Letter, deprived the Applicant through collusive illegal action between Respondent Nos. 1 to 3.

It is apt to note that as per Article 12 of the Loan Agreement, the parties to the agreement have agreed that in the event of any dispute or difference or claim that arises between the parties in relation to the agreement or any condition therein, such dispute shall be referred to arbitration. Thus, prima facie, an arbitration agreement exists between the parties to the Loan Agreement.

On perusal of facts of the present case, prima facie, it is evident that there are arbitrable disputes between the Applicant and Respondent Nos. 1 & 2. However, Respondent No. 3 has raised two preliminary objections: (i) he is a non-signatory to the Loan Agreement, and (ii) no notice invoking arbitration under Section 21 of the Act was issued to him. He contends that an arbitration agreement exists solely between the Applicant and Respondent Nos. 1 & 2. Respondent No. 3 is neither a signatory nor a borrower or guarantor to the said Loan Agreement. There is no privity of contract between the Applicant and Respondent No. 3. No Notice invoking arbitration making any specific demand or claim was issued against Respondent No. 3. He further submits that the original title documents of the schedule property are still in the custody of Respondent No. 4, despite full repayment of the loan amount availed by him. He made repeated bona fide efforts and sent multiple e-mails dated 24.10.2024, 04.11.2024, 06.02.2025, and 11.02.2025. He also made personal visits along with the Applicant’s representative to the Hyderabad branch of Respondent No. 4 company on 10.11.2024 and 12.11.2024. Furthermore, he lodged complaints before the Banking Ombudsman to secure release of documents. The failure to hand over original documents is solely attributable to Respondent No. 4 and not to him.

In support of his contentions, Respondent No. 3 places reliance on the judgments of the Hon’ble Supreme Court in Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya & Anr.^{11.(2003) 5 SCC 531.}, Jagdish Chander v. Ramesh Chander^{22.(2007) 5 SCC 719.}, S.N. Prasad v. Monnet Finance Ltd^{33.(2011) 1 SCC 320.}, and Deutsche Postbank Home Finance Ltd. v. Taduri Sridhar & Anr^{44.(2011) 11 SCC 375.}. Basis the aforesaid judgments, he contends that the existence of an arbitration agreement as defined under Section 7 of the Act and existence of disputes between parties are conditions precedent for exercising the power to appoint an arbitrator under Section 11 of the Act. Further, an arbitration agreement cannot be extended to non-signatories so as to impose obligations upon persons who have not consented to arbitration. Further reliance was placed on the judgment of the Supreme Court in Hindustan Petroleum Corporation Ltd. v. BCL Secure Premises Pvt. Ltd.^{55.(2026) 3 SCC 711.} to contend that the Referral Court must prima facie rule on the existence of arbitration agreement and determine whether the non-signatory is a veritable party or not. In respect of the contention that Notice invoking Arbitration under Section 21 of the Act is mandatory, reliance was placed on the judgment of the Supreme Court in Arif Azim Company Ltd. v. APTECH Limited^{66.(2024) 5 SCC 313.} and the Order of this Court in Kurnuda Sreenivasa Sasikanth v. Ananya Child Development and Early Intervention Clinic^{77.2024 SCC Online TS 4218.}.

On the contrary, the Applicant places reliance on the judgments of the Supreme Court in Cox & Kings Ltd. v. SAP India Pvt. Ltd. & Ors.^{88.(2024) 4 SCC 1.} and Ajay Madhusudhan Patel v. Jyotindra S. Patel & Ors.^{99.(2025) 2 SCC 147.}, and the Orders of this Court in M/s SV Properties v. G. Chalapathi Rao^{1010.MANU/TL/0231/2024.} and K. Bala Vishnu Raju v. Emmar India Limited & Ors.^{1111.MANU/TL/0668/2025.} to submit that the scope of review by a Referral Court under Section 11(6) of the Act is limited, and that a non-signatory can be made a party to the arbitration proceedings on determining whether such party is a veritable party or not. With regard to the objection as to non-issuance of a Notice invoking arbitration under Section 21 of the Act to Respondent No. 3, the Applicant places reliance on Adavya Projects Pvt. Ltd. v. M/s Vishal Structurals Pvt. Ltd. & Ors.^{1212.2025 INSC 507} and Bhageeratha Engineering Ltd. v. State of Kerala^{1313.(2026) 5 SCC 758} to contend that the issuance of a Notice invoking Arbitration under Section 21 of the Act is not mandatory.

I have considered the submissions advanced by the Applicant and Respondent No. 3, as well as the precedents relied upon by them respectively. It is well settled that even a non-signatory to an arbitration agreement may be impleaded as a party in arbitration proceedings. In order to determine the intention of a non-signatory to be bound by the arbitration agreement; the Referral Court is required to consider certain factors such as the conduct of the non-signatory, mutual intent of parties, relationship of a non-signatory with a signatory, commonality of subject-matter, composite nature of transactions, and performance of contract.

In the present case, Respondent No. 3 specifically contends that the Referral Court under Section 11 of the Act should prima facie determine whether a non-signatory is a veritable party or not. In this regard, reference is being made to the judgment of a Three-Judge Bench of the Hon’ble Supreme Court in Ajay Madhusudan Patel (supra), wherein the limited scope of jurisdiction afforded under Section 11(6) of the Act was reiterated. It was observed that the conduct of a non-signatory party along with the other attending circumstances may lead the Referral Court to draw a legitimate inference that it is a veritable party to the arbitration agreement. The Supreme Court also observed that a dual test needs to be satisfied for compelling a non-signatory party to be a party to arbitration proceedings, namely: (a) Non-signatory should be shown to have agreed to the underlying contract, and (b) Non-signatory should be shown to have agreed to be bound by the arbitration agreement. It was reiterated that Section 11(6) of the Act, 1996, confers limited jurisdiction, and thus, Courts should not conduct a mini trial or delve into contested/disputed questions of fact.

Recently, the Hon’ble Supreme Court in KKH Finvest Pvt. Ltd. & Anr. v. Ashiesh Shukla & Ors.^{1414.2026 INSC 803} reiterated the principle of ‘veritable parties’ referring to its earlier decision in Cox & Kings Ltd. (supra). It held that the principle of ‘veritable parties’ would be applicable in situations where a person or entity may not sign an arbitration agreement, yet give the appearance of being a veritable party to such agreement due to that person/entity’s legal relationship with the signatories to the agreement and involvement in performance of the underlying transaction or contract. The relevant paragraph is extracted hereunder:

In the present case, on prima facie examination of the facts, I am of the opinion that Respondent Nos. 3 despite being non-signatory to the Loan Agreement is a veritable party. The conduct and role of Respondent No. 3 in the underlying transaction demonstrates his substantial and direct involvement. Further, his relationship with Respondent Nos. 1 & 2, whereby they had availed loan from the Applicant specifically for purchasing the schedule property from Respondent No. 3, establishes a direct relationship between them. The Loan Agreement, the sale of the schedule property, and obtaining the Foreclosure Letter are interconnected and form part of a composite transaction. In light of the same, on a prima facie, Respondent No. 3 is a veritable party, and thereby can be made party to the arbitral proceedings. However, it is pertinent to clarify, referring to Hindustan Petroleum Corporation Ltd. (supra), that even if the Referral Court holds that prima facie, a non-signatory is a veritable party, it will not foreclose the Arbitral Tribunal from concluding to the contrary after an intensive inquiry. Thus, it is open for the Arbitral Tribunal to exercise its jurisdiction under Section 16 of the Act and decide the issue of a non-signatory being a veritable party, after conducting an independent enquiry based on factual aspects and application of legal doctrines.

With respect to Notice invoking Arbitration, Respondent No. 3 contends that a Notice invoking arbitration under Section 21 of the Act is mandatory in order to exercise powers under Section 11(6) of the Act for appointment of an arbitrator. In my view, such contention is untenable. The Hon'ble Supreme Court in Bhagheeratha Engg. Ltd. (supra), held that the object of Section 21 of the Act, is only for the purpose of commencement of arbitral proceedings. Section 21 of the Act is concerned only with determining the commencement of the dispute for the purpose of reckoning limitation. There is no mandatory prerequisite for issuance of such notice prior to the commencement of arbitration. The issuance of a Notice invoking arbitration under Section 21 of the Act may come to the aid of parties and the arbitrator in determining the limitation for the claim. Failure to issue such notice would not be fatal to a party in arbitration if the claim is otherwise valid and the disputes arbitrable. Therefore, it is clear that issuing a Notice invoking arbitration under Section 21 of the Act is not mandatory, and would not be fatal to the arbitral proceedings. In the present case, although the notice invoking arbitration was issued to Respondent Nos. 1 & 2, no such Notice was issued to Respondent No. 3. The issuance of such notice is ordinarily relevant for determining the commencement of arbitral proceedings and computing limitation. In the case on hand, limitation is not a contested issue. Non issuance of the Notice invoking arbitration does not prejudice any party and cannot be fatal to the case of the Applicant.

For the sake of reiteration, in the present case, I am of the opinion that prima facie Respondent No. 3 despite being a non-signatory, is a party to the arbitration agreement. Moreover, issuing a Notice invoking Arbitration under Section 21 of the Act is not mandatory and is not fatal to the claim of the Applicant herein.

As discussed supra, there are disputes between the Applicant and the Respondents with regard to handing over original documents of the schedule property covered under the Loan Agreement dated 19.09.2024. The same are arbitrable in nature.

In the light of the aforesaid discussion, the present Arbitration Application is allowed. Accordingly, Sri K. Sudarshan, Retired District Judge, H.No.8-7-97/85/P-II/74, Agriculture Colony, Hasthinapuram, Hyderabad-500006, Mobile No.9866415720 appointed as the Sole Arbitrator to adjudicate disputes between the parties. The parties are at liberty to take all the pleas and defences before the learned Sole Arbitrator.

Consequently, miscellaneous Petitions, pending if any, in this Arbitration Application, shall stand closed.