Arbitral Award Passed By Sole Arbitrator Appointed Unilaterally Is Without Jurisdiction And Non-Est: Delhi Court

Brief Facts

Sumit Gera (petitioner) took loan from M/s. HDFC Bank Ltd. (respondent) to purchase a Maruti Alto LXi CNG car. Thereafter, a supplementary agreement was also executed in which top up loan was also given to the petitioner on May 19, 2016. The top up loan amount to the tune Rs. 3,04,462 had to be paid within 36 months with a monthly instalments of Rs. 10,630 each along with an interest at 15.51% per annum. The bank sent a demand a notice on March 7, 2017 when the petitioner defaulted in repaying the loan. Thereafter, the bank seized the vehicle on April 17, 2017.

A sole arbitrator was also appointed by the bank unilaterally on May 3, 2017 to resolve the dispute who issued a notice to the petitioner. However, the petitioner failed to appear before the arbitrator therefore the arbitrator proceeded ex parte. The vehicle was sold on June 29, 2017 for the amount of Rs. 1,19,000. Consequently, in an ex-parte award passed by the arbitrator, the petitioner was directed to pay Rs. 3,05,983 along with interest at 15.51% per annum on August 31, 2017. While directing the petitioner to pay the amount, the amount of vehicle was also adjusted.

The petitioner challenged this award under section 34 of the Arbitration Act on the ground that the arbitrator was appointed in an improper manner that violated the principle of natural justice.

Contentions of parties

The petitioner submitted that the appointment of the arbitrator was illegal and requested to set the award aside on this ground. It was further contended that a proper notice under section 21 of the arbitration act was not served on the petitioner while invoking the arbitration clause. It was further argued that the petitioner did not get an opportunity to participate in the selection process of the arbitrator. It violated the principle of party autonomy and natural justice. The petitioner relied on the Supreme Court judgment in Perkins Eastman Architects DPC and Ors. vs. HSCC (India) (2019) wherein it was held that an arbitrator cannot be appointed unilaterally by a party interested in dispute. It was further submitted that the award was void on the ground that it tainted with an element of bias and lack of independence in the arbitration process.

Per contra, the respondent submitted that it had no objection to set the award aside. It was acknowledged by the respondent that the arbitrator was appointed unilaterally which breached the provisions of the arbitration act.

Court's Analysis

The court noted that there was an arbitration clause in the agreement which empowered the bank to appoint the arbitrator unilaterally to resolve disputes. The court further observed that this clause gave an authority to the bank to appoint the arbitrator without any consultation with opposite party. The court further observed that such a sweeping power given to only one party to appoint the arbitrator violated the principles of arbitration like party autonomy and mutual agreement in the selection process of the arbitrators.

The court further observed that principle of natural justice that no one should be a judge in his own cause underpins the arbitration process. Impartiality and independence of the arbitrators in the arbitration process ensure fairness and integrity. The court further observed that since in the present case the unilateral authority to appoint the arbitrator by an interested party like the bank compromised the principle of fairness in the arbitral proceedings.

The court referred to the Delhi High Court judgment in Smaaash Leisure Ltd. vs. Ambience Commercial Developers Pvt. Ltd.(2023) wherein it was held that it is no longer res integra that an arbitral award rendered by an Arbitrator, who is ineligible to act as an Arbitrator cannot be termed as an arbitral award and thus not binding on the parties. The court further referred to the Delhi High Court judgment in Kotak Mahindra Bank Ltd. vs. Narendra Kumar Prajapat (2023) in which it was held that the arbitral award rendered by a person who is ineligible to act as an arbitrator cannot be considered as an arbitral award. The ineligibility of the arbitrator goes to the root of his jurisdiction. This decision was further affirmed by the Supreme Court.

The court further held that since in the present case also the arbitrator was appointed unilaterally, any award passed by such an arbitrator is null and void.

Conclusion

The court concluded that an arbitrator cannot be appointed unilaterally as it would violate the principle of party autonomy on which the entire edifice of the arbitration act rests. Accordingly, the impugned award was set aside.

Case Title: Sumit Gera v. M/s. HDFC Bank Ltd.

Court: Commercial Court, Tis Hazari Courts, Delhi

Case Reference: DLCT01-003012-2021

Judgment Date: 09/10/2024

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