Arbitration Clause Valid But Unilateral Appointment Part Is Invalid: Kerala High Court

Brief Facts:

Divya Lekshmi Sanal (“1st respondent”), a member of the Travancore Rural Development Producer Company Ltd (“Applicant”), joined the Members Mutual Fund Scheme launched by the Applicant and took a loan of Rs.2,93,000/- from the Applicant company. Narayana Panicker and Omana Amma (2nd and 3rd Respondents) guaranteed this loan, and all necessary agreements were executed in favour of the Applicant company. These agreements included a provision allowing the Applicant company to appoint an Arbitrator in the event of any disputes related to loan repayment.

The Applicant company alleged that the Respondents defaulted on the loan repayment. Consequently, the Applicant unilaterally appointed an Arbitrator, who subsequently passed an award. This award directed Respondents 1 to 3 to pay Rs.2,54,136/- with interest at 18% per annum, along with costs of Rs.7,150/- to the Applicant. However, when the Applicant filed an execution petition before the District Court, Pathanamthitta, it was dismissed by the Additional District Judge-II, Pathanamthitta. The dismissal was based on the unilateral appointment of the Arbitrator. Following this dismissal, the Applicant approached the High Court for the appointment of a new Arbitrator.

Observations by the High Court:

The High Court noted that the agreements contained arbitration clauses allowing disputes to be resolved by an Arbitrator appointed by the Applicant. The High Court concurred with the Additional District Judge-II, Pathanamthitta, who had previously held that a unilateral appointment of an Arbitrator was impermissible under the proviso to Section 12(5) of the Arbitration Act, as well as the decisions of the Supreme Court and the High Court in cases such as Bharat Broadband Network Limited v. United Telecom Limited [(2019) 5 SCC 755], Perkins Eastman Architects DPC and Another v. H.S.C.C (India) Limited [AIR 2020 Supreme Court 59], and Hedge Finance Private Limited, Ernakulam v. Bijish Joseph [ILR 2022 (3) KER 947].

The High Court held that the arbitration clauses in the agreements did not align with the legal provisions prohibiting unilateral appointments of arbitrators. Nevertheless, it held that these arbitration clauses should not be completely discarded due to this defect. The High Court held that these clauses remained valid as arbitration agreements, with the exception of the portions granting the applicant unilateral appointment authority.

Therefore, the High Court decided to grant the Applicant's request for the appointment of a sole Arbitrator to resolve the dispute regarding the default on the loan repayment by the respondents. Consequently, the Application was allowed, and Mr. Biju B.K. was nominated as the sole Arbitrator to adjudicate and resolve the disputes and differences between the parties.

Case Title: Travancore Rural Development Producer Company Ltd. Vs Divya Lakshmi Sanal And Ors

Case Number: AR NO. 74 OF 2024

Advocate for the Petitioner: P.Paulochan Antony, Sreejith K. and R.Girish.

Advocate for the Respondent: None

Date of Judgment: 7TH DAY OF JUNE 2024

Citation : 2024 Live Law Ker 356

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