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by sayum
18 May 2026 2:57 PM
“Even if one-sided optionality exists, courts can excise the invalid portion and preserve the agreement to arbitrate” – Bombay High Court, in the case of Tata Capital Limited v. Vijay Devij Aiya & Anr. (Commercial Arbitration Applications No. 237 and 243 of 2024), upheld the validity of an arbitration clause in a financial agreement, despite it containing a unilateral opt-out provision favoring the lender under the SARFAESI Act. Justice Somasekhar Sundaresan ruled that such a clause does not render the entire arbitration agreement void and appointed an independent sole arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996.
The dispute arose from a Loan Agreement dated 31st January 2016 and a Top-Up Loan Agreement dated 31st October 2017 between Tata Capital Limited and the respondents. Clause 12.18 of both agreements contained the arbitration provision.
The Respondents opposed arbitration, pointing to a provision allowing Tata Capital to terminate arbitration proceedings unilaterally if it opted to proceed under the SARFAESI Act or the DRT Act. They contended that this violated the mutuality required for a valid arbitration agreement, citing a Division Bench decision of the Delhi High Court in Tata Capital Housing Finance Ltd. v. Shri Chand Construction & Apartments Pvt. Ltd.
The key issue was whether the arbitration clause could be enforced when it allowed only one party—the lender—to opt out under specific statutory frameworks, thereby allegedly destroying mutuality.
Justice Sundaresan clarified: “The arbitration agreement entails a unilateral appointment of an arbitrator, which is a facet now clearly declared as being untenable and in conflict with the foundational principle of independence and impartiality.”
However, the Court did not strike down the arbitration clause. Instead, it held: “Just as the element of unilateral appointment has been held to be illegal and that element is excised by courts, it may follow that one party’s option to terminate the arbitration agreement can be excised by eliminating such right or by making such right bilateral to save the arbitration agreement.”
Dismissing the reliance on the Delhi High Court’s ruling, the Court distinguished the present context, observing:
“Neither are the Respondents seeking to litigate outside arbitration nor is the Applicant seeking to non-suit the Respondents in any other forum.”
Thus, the Court held that the presence of such a clause does not destroy the existence of the arbitration agreement, particularly when the lender had not exercised the opt-out right.
It further affirmed: “Section 11(6A) limits the court’s review to the existence of an arbitration agreement. Questions of validity or jurisdiction are for the arbitral tribunal under Section 16.”
On the respondents' contention that an earlier arbitration had lapsed due to the appointment of a unilaterally nominated arbitrator, the Court ruled:
“The lapsing of the mandate was the mandate of an arbitral tribunal that was non est in the eyes of law.”
Justice Sundaresan appointed Mr. Sandeep H. Parikh, Advocate, as the Sole Arbitrator to adjudicate the dispute. The order laid down procedural directions, including that:
“All arbitral costs and fees of the Arbitral Tribunal shall be borne by the parties equally in the first instance, and shall be subject to any final Award.”
The Court explicitly declined to stay the order, observing: “No case is made out to stay such an order since the interest of the Respondent are well protected.”
This judgment reinforces the jurisprudence that minor or one-sided procedural clauses in arbitration agreements—such as unilateral appointment or opt-out rights—do not nullify the existence of the core agreement to arbitrate, especially under the limited scrutiny permitted by Section 11.
As Justice Sundaresan concluded: “The optionality in the second part ought not to erode the substratum of the arbitration agreement.”
Date of Decision: 22 April, 2025
