Punjab and Haryana High Court – Arbitration Clause Cannot Be Invoked Against a Non-Signatory; Civil Revision Dismissed

Case Name: Mahindra & Mahindra Financial Services Ltd. v. Anoop Singh and Another

Citation: Civil Revision No. 7709 of 2014

Date of Judgment: 6 January 2020

Bench: Justice Fateh Deep Singh

Held: The Punjab and Haryana High Court held that an arbitration clause in a loan agreement cannot be enforced against a third party who was not a signatory to the agreement. Since the subsequent purchaser of a vehicle, in whose favour no privity of contract existed with the financier, sought to assert ownership through a civil suit, the financier could not invoke the arbitration clause to refer the dispute to an arbitrator.

Summary: The case arose out of a loan agreement dated 13.10.2005 under which Mahindra & Mahindra Financial Services Ltd. financed a Mahindra Maxx Pick-Up vehicle purchased by Surjit Singh, the borrower. The vehicle was hypothecated in favour of the financier. When the borrower defaulted in repayment, he sold the vehicle in March 2007 to Anoop Singh, who thereafter filed a civil suit claiming ownership and seeking directions to the financier to transfer the vehicle in his name and restraining it from repossessing the vehicle. During the pendency of the suit, the financier moved an application under Section 8 of the Arbitration and Conciliation Act, 1996, contending that the dispute was covered by the arbitration clause in the loan agreement. The trial court dismissed the application on 8.9.2014, holding that the plaintiff was not a party to the agreement.

In revision, the High Court noted that the sale had been effected without compliance with Sections 48, 50, and 51 of the Motor Vehicles Act, 1988, and that the hypothecation in favour of the financier continued to subsist. The Court reiterated the principle that a person who is not a party to a contract cannot enforce or be bound by its covenants, citing Tirumulu Subbu Chetti v. Arunachalam Chettiar (AIR 1930 Mad 382 FB) and M.C. Chacko v. State Bank of Travancore (1969) 2 SCC 343. The plaintiff, not being a signatory to the loan agreement, had no enforceable contractual relationship with the financier, and therefore the arbitration clause could not be invoked.

Decision: The High Court dismissed the revision petition filed by the financier, upholding the trial court’s refusal to refer the matter to arbitration, and held that the claim over the vehicle’s ownership was to be adjudicated in the pending civil suit.