Unilateral Appointment Of Arbitrator & Non Service Of Notice : Madras High Court Sets Aside Arbitral Award

Therefore, the bench held that such an arbitral award was against the public policy of India and violated the principles of natural justice.

Brief Facts:

Vipul Kumar Tulsian and Sanjay Kumar Tulsian (Petitoners) approached the High Court to set aside the arbitral award issued by the Sole Arbitrator in the arbitration between the Petitioners and M/s.Sundaram Finance Ltd (Respondent). The Petitioners argued that the first Petitioner entered into a loan agreement with the Respondent for a sum of Rs. 4,13,00,550/-. The second Petitioner acted as a guarantor and executed a Deed of Guarantee on the same date. The first Petitioner consistently paid the installments until the 14th payment after which defaults occurred. As a result, the first Petitioner hypothecated the subject vehicle as security for the remaining amount and the second Petitioner paid Rs. 54,50,000 to the Respondent. Despite this, the Petitioners received notice of Execution Proceedings and were handed a xerox copy of the arbitral award on the first hearing of these proceedings.

The Petitioners claimed they were unaware of the award until January 31, 2023 during the first hearing of the Execution Proceedings. They also not received any prior notice or communication from either the Respondent or the Arbitrator. They alleged that the Respondent unilaterally appointed the Sole Arbitrator without issuing any arbitral notice.

Observations by the High Court:

The High Court noted that the Respondent did not send any notice under Section 21 of the Arbitration Act nor did it provide a copy of the arbitration award.

According to Schedule VII of the Arbitration Act, an arbitrator is ineligible for appointment if they are an employee, consultant, advisor, or have any past or present business relationship with a party involved in the dispute. Additionally, if the arbitrator holds a managerial position, such as a Director or part of the management, or has a controlling influence in an affiliate directly involved in the arbitration matter, they are also ineligible.

The High Court referred to the decision of the Supreme Court in the Perkins Eastman Architects DPC Vs. HSCC (India) Ltd. where it was held that an ineligible person is not only barred from being appointed as an arbitrator but also cannot nominate any other person as an arbitrator.

The High Court noted that the Respondent appointed an arbitrator unilaterally without the Petitioner's consent. Section 12(5) of the Arbitration Act states that any person with a relationship falling under the categories specified in the Seventh Schedule is ineligible to be appointed as an arbitrator. Further, such individuals are also ineligible to nominate anyone else as an arbitrator unless there is an express agreement in writing between the parties waiving this ineligibility after the dispute has arisen. Here, the bench noted, no such express agreement exists between the parties.

The Perkins case provided further clarity. The Supreme Court held that if an arbitrator, such as a Managing Director, becomes ineligible under the law, they cannot nominate another person as an arbitrator. The Supreme Court held that the managing director or any person with a vested interest in the dispute's outcome must not have the authority to appoint an arbitrator.

The High Court noted that the Respondent proceeded with arbitration unilaterally and appointed the Arbitrator without any intimation to the Petitioners. The Petitioners neither received notices of hearing nor appeared before the Tribunal, and consequently, the Arbitrator did not afford any opportunity to the Petitioners to contest the matter. As a result, the Petitioners had no chance to file a counter and contest the proceedings. Even if the Petitioners had filed a counter, the High Court noted that award would still be liable to be set aside due to a violation of the provision under Section 12(5) of the Arbitration and Conciliation Act, 1996.

Therefore, the High Court held that the award is not sustainable under the law. The award is against the public policy of India and violated the principles of natural justice. Consequently, the Arbitration Original Petition was allowed, and the award passed by the Arbitrator was set aside.

Further, Mr. K.R. Samratt, Advocate, was appointed as the sole arbitrator to enter upon the reference and adjudicate the disputes between the parties.

Case Title: Vipul Kumar Tulsian and anr vs M/s.Sundaram Finance Ltd

Case Number: Arb.O.P (Com.Div.) No.282 of 2023 and A.No.3197 of 2023

Advocate for the Petitioner: Mr.M.L.Joseph for M/s.Chennai Law Associates

Advocate for the Respondent: Mr.Uma Shankar, for M/s.Shree and Shankar Associates

Date of Judgment: 23.07.2024

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