How to Handle Loan Agreement Arbitration in India

What Loan Agreement Arbitration Means in India

Remember when you applied for that loan and signed the agreement in haste. You read the interest rate, monthly payments, foreclosure amount and other highlighted points. What about the last few pages? Did you read the arbitration clause?

An arbitration clause in your loan agreement allows the lender to refer the loan related disputes to arbitration. It can be about pending EMIs, foreclosure charges, bounce charges, penal interest, vehicle loan dues, wrongful repossession, personal loan default, business loan default or guarantor liability. Any breach of settlement or loan terms can technically trigger arbitration if the clause is invoked.

In arbitration of loan disputes, lender sends a notice invoking arbitration under the agreement. After notice, arbitrator may be appointed and lender files a claim or statement of claim. Borrower is asked to file defence, reply along with documents and objections. Some claims even allow borrower to file counterclaims in loan arbitration.

Don’t assume a reply is not required in arbitration. Most borrowers ignore arbitration proceedings completely. But what they miss is that if you do not reply or appear, arbitrator can still conduct the arbitration ex parte (continue the process without you). Later an award can be passed against you. Don’t think one award will not result in serious recovery attempts.

Section 13 of the Arbitration and Conciliation Act, 1996 mentions that parties are to be treated with equality and each party is entitled to a full opportunity of presenting his case. Also read section 18 of the Act. It allows for statement of claim, statement of defence, submission of documents, counterclaims and set off if they fall within the scope of arbitration agreement.

Why Banks and NBFCs Use Arbitration in Loan Disputes

So why would banks or NBFCs even choose arbitration? Simple. It’s faster than filing a lawsuit. Also, since loan agreement has an arbitration clause, lenders rely on that clause to initiate arbitration.

In loan arbitration by banks and NBFCs, lender typically tries to prove these points.

Borrower can raise more arguments than saying yes or no to these points. Borrower can raise defences such as payment history, calculation error on part of lender, non availability of documents, unjust recovery practices, pending settlement negotiation, financial hardship, improper notice of repayment, incorrect loan account details, wrongful arrest/reporting of borrower or unilateral and unfair appointment of arbitrator.

Note that I have come across many loan arbitration claims filed by lenders which are mostly drafted like a regular recovery application. Lenders rarely explain borrower side of story while sending arbitration claim. That is where borrower’s reply and presentation of documents become important.

Lender may argue “You signed loan agreement.” Borrower can argue “Yes, but claimed amount is not correct, penalties are excessive, there was never any account reconciliation, we were discussing settlement and this whole procedure is being done unfairly.”

Both can be true at the same time. Borrower may owe lender money, but that doesn’t mean every arbitrary charge, every legal notice and every illegal threat becomes valid.

Facing Harassment by Loan Recovery Agents? Learn about DRT Lawyers in Delhi here

Common Borrower Defences in Loan Arbitration

Guides on loan arbitration misses one thing. Borrower defence in loan arbitration is not limited to showing you did not default. Borrower can argue unfair charges, mistakes in calculation, improper notices, lack of documentation, misconduct by lender during recovery and pending settlement negotiations.

Here are some defence points borrowers raised depending on facts. Use them wisely if facts apply to you.

Incorrect/outstanding amount is wrong or exaggerated

Loan claims usually mention principal dues, interest amount, penal interest, bounce charges, collection expenses, legal fees and future interest. Ask yourself if lender has adjusted all your payments. Ask if any settlement amount was agreed upon. Ask if penal charges are in-line with clause and was it disclosed clearly.

Did you receive loan agreement?

Many borrowers apply loans digitally and either never receive loan documents or face issues when asking for loan documents from lenders. If lender has failed to give you repayment schedule, loan agreement, Sanction letter or statement of loan account, raise that point.

Challenge improper arbitration invocation

Lender must show that they invoked arbitration as per terms of agreement. Is notice ambiguous? Was notice sent to your old address or does not properly identify nature of dispute? Challenge improper notice.

Unilateral appointment of arbitrator

Loan agreements generally allow lender to appoint sole arbitrator. Indian courts have become stricter on impartiality and independence of arbitrators. Even Supreme Court has observed that neutrality and independence, along with integrity, impartiality and objectivity of an arbitral tribunal are matters of public policy and courts can look into whether the procedure of appointment violated any duty to appoint an independent and impartial tribunal.

Doesn’t mean every arbitration notice is unfair. Arbitrators can be appointed by lenders in loan disputes. But if lenders arbitrarily appoint without any consent from borrower, get the clause reviewed by an arbitration lawyer for loan dispute cases.

Pending Settlement Talks

If you were discussing an OTS amount, waiver, restructuring or foreclosure amount with lender, put it on record. Submit evidence of emails, letters, WhatsApp conversations and any payment screenshot which can prove settlement discussions were taking place.

Loan recovery harassment

Did recovery agents call your employer, relatives, visit your office, use abusive language, threaten false police cases in simple loan default matters or made embarrassing calls to family members? Keep proof. RBI has given instructions to banks about due diligence while appointing recovery agents. RBI has also told banks that contracts with recovery agents should not encourage uncivilized, unlawful, unacceptable or dubious recovery tactics.

Consumer rights can also play role when there is wrong reporting by banks, failure to update requested settlement, excessive charges, non response to borrower complaints, refusal to share account statements or harassment by a regulated entity. Borrowers have approached RBI via Ombudsman Scheme for deficiencies in service by regulated entities if the complaint is not resolved or not replied within 30 days by regulated entity.

Loan default by Guarantor?

Are you defending claim as guarantor to someone elses loan? Check if you received proper default notice of primary borrower. Check if primary borrowers default was established correctly. Challenge if claim against you as guarantor is more than what is mentioned in guarantee agreement.

Assignment

Loans get assigned to ARCs or other lenders. Check if assignment notice was given to you. Are loan documents showing loan was transferred to new lender. Is arbitration clause restricting assignment or initiation of arbitration to only lender?

When to Contact a Lawyer for Arbitration on Loan Disputes

Here are few situations where you should contact lawyer for arbitration in loan matters.

• Arbitration notice was received.
• You received claim from arbitrator.
• Arbitrator has fixed hearing date.
• Claimed amount seems to be highly inflated.
• Lender has appointed arbitrator unilaterally without your consent.
• Loan documents were not supplied to you.
• Facing harassment from recovery agents during loan repayment.
• Loan settlement offer was ignored by lender.
• Loan account was wrongly reported post payment.
• Vehicle or asset being used as loan collateral is under threat.

Lawyer can review arbitration clause, send reply on your behalf, raise objections about jurisdiction, request information, object wrongful appointment, dispute excess charges and negotiate possible settlement. If award is passed against borrower, lawyer can advice on challenge mechanism.

Learn about Arbitration Lawyers in Delhi or Loan Settlement Lawyer in India or DRT Lawyers in Delhi from Legals365.