Delhi District Court
Pawan Kumar And Ors vs Shri Ram Transport Finance Co Ltd And Ors on 1 February, 2024
IN THE COURT OF GORAKH NATH PANDEY
DISTRICT JUDGE (COMMERCIAL COURT),
NORTH DISTRICT, ROHINI COURTS: DELHI.
OMP (COMM.) 15/2022
CNR NO.DLNT01003252022
(1) SH. PAWAN KUMAR,
S/O SH. SATYAPAL,
H.NO.190, VILLAGE AND POST BARWALA,
NORTH WEST, DELHI - 110039.
(2) SH. MUKESH KUMAR,
S/O SH. MAN SINGH,
H.NO.396, VILLAGE AND POST BARWALA,
NORTH WEST, DELHI - 110039.
...... Petitioners.
VERSUS
(1) SHRIRAM TRANSPORT FINANCE CO. LTD.
HAVING ITS REGISTERED OFFICE AT
MOOKAMBIKA COMPLEX, 3RD FLOOR,
4 LADY DESKIA ROAD, MYLAPORE,
CHENNAI - 600004.
AND ITS BRANCH OFFICE AT
431/64/1, GROUND FLOOR,
LDA TRUST ESTATE, KEWAL PARK EXTENSION,
AZADPUR, DELHI - 110033.
(2) SH. B. L. GARG
SOLE ARBITRATOR,
A-9, GANPATI APARTMENTS,
6, ALIPUR ROAD, CIVIL LINES,
DELHI - 110054. .....Respondents
Date of Institution : 22.04.2022
Date of final arguments : 01.02.2024
Date of decision : 01.02.2024
Decision : 01.02.2024
OMP (COMM.) 15/2022 Page no.1/10
Pawan Kumar v. Shriram Transport Finance Co. Ltd. & Anr.
J U D G E M E N T:-
1. Vide this petition u/s 34 of Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Act), the Petitioners have assailed the arbitral award dated 25.02.2015 passed by Sole Arbitrator in Arbitration Case No.ARB/BLG/4967/2014 (hereinafter called the impugned Award) and prayed to set aside the same being illegal.
2. As contended, the petitioner no.1 had booked a commercial vehicle i.e. TATA Ace CNG and had paid a consideration of Rs.76,000/- to DV Motors. The AR of the respondent no.1 had approached the petitioner no.1 pursuant to the booking made by petitioner no.1 and offered him a commercial vehicle loan facility. On 30th September, 2009, the petitioner no.1 had purchased the commercial vehicle bearing DL1CM 0527 at a total sale consideration of Rs.3,45,841/- and the respondent no.1 had granted him a loan of Rs.1,98,300/- vide loan cum hypotehcation agreement no.AZDPRO301160006 dated 17.01.2013 against the vehicle. The petitioner no.2 stood guarantor of the loan. The petitioner contended that he has paid all the EMI till 10.10.2024. Since the dispute arose due to the default in making the timely payment of EMI by the petitioner no.1 on 10.10.2014, the respondent no.1 had appointed the respondent no.2 Sole Arbitrator Sh. B. L. Garg vide letter dated 30.10.2014 to adjudicate the dispute arose related to default in making the payment of EMIs and for recovery of outstanding dues without the consent of the petitioners nor the petitioners ever informed about the appointment of Ld. Sole Arbitrator by OMP (COMM.) 15/2022 Page no.2/10 Pawan Kumar v. Shriram Transport Finance Co. Ltd. & Anr. the respondent no.1; Ld. Arbitrator proceeded with the matter and lastly passed the ex-parte impugned award and the petitioner no.1 only came to know about the ex-parte award passed against him when he received the show cause notice in Execution Civil Petition no.506/2021.
3. It is submitted by the Ld. Counsel for the Petitioners that the impugned award suffers from several infirmities as under:
(i) the respondent no.1 did not serve the petitioners with a notice under Section 21 of the Act;
(ii) the respondent no.2 is a 'Stock Arbitrator' for respondent no.1 and his non-disclosure under Section 12 of the Act is an act in contravention to the provisions of the act;
(iii) Ld. Arbitrator had not considered the EMI's paid by the petitioner no.1 while passing the award in question;
(iv) award passed by respondent no.2 does not meet the requirement of principle of natural justice and is against the fundamental policy of Indian Law;
(v) the Arbitrator was unilaterally appointed by the respondent no.1 without consent of the petitioners;
(vi) no proper notice was given to the petitioners for appointment of an arbitrator before initiating the arbitral proceedings;
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(vii) the award has passed mechanically without appreciating the evidence on record; and
(viii) the interest awarded by the Ld. Arbitrator is against the public policy.
In view of these circumstances, it is claimed that the appointment of Sole Arbitrator to adjudicate upon the disputes between the parties was illegal and the arbitration proceedings were vitiated right since their commencement.
4. None appeared in the matter on behalf of the respondent no.1 nor the petition is replied by the respondent no.1 despite opportunities. The record of arbitration proceedings has also not been placed on record by the respondent no.2 despite being served with the notice.
5. I have heard the Ld. Counsel for the petitioners and gone through the material on record. The counsel for the petitioners also filed written submissions and relied upon the judgment titled Kotak Mahindra Bank Ltd. v. Narendra Kumar Prajapat passed by Hon'ble High Court of Delhi in EFA (Comm) 3/2023 dated 17.05.2023 in support of his contentions.
6. Perusal of the impugned award shows that the loan agreement contains Clause no.15 as Arbitration Clause. Respondent no.2 i.e. Ld. Sole Arbitrator was appointed by the respondent no.1 company.
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It has been held by the Hon'ble Supreme Court in TRF Ltd. Vs. Energo Engineering Projects Ltd. (2017) 8 SCC 377 that when the Managing Director of a Company has been specifically made ineligible to act as an Arbitrator in a dispute involving the Company by virtue of Section 12 (5) of the Arbitration and Conciliation Act, 1996 r/w 7 th Schedule, he cannot nominate any other person also as an Arbitrator. It would be apposite to reproduce the following paragraph of the said Judgment:-
"54. In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so".
7. The said proposition of law enunciated in the above noted Judgement of the Hon'ble Supreme Court has been affirmed in the subsequent Judgements in Perkins Eastman Architects DPC & Anr. Vs. HSCC (India) Ltd. (2019) 17 SCR 275 and Bharat Broadband Network Ltd. Vs. United Telecoms Ltd. (2019) 6 SCR 97 also.
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8. In the instant case also, the management of the Respondent Company which has been authorized to appoint Arbitrator vide Clause 15 of loan agreement was not competent to appoint the Arbitrator in view of the law enunciated by the Hon'ble Supreme court in the above judgements and therefore, the Arbitrator appointed by them was ineligible to conduct the arbitration proceedings. Thus, it is evident that arbitral reference itself in this case began with an illegal act and vitiate the entire arbitral proceedings from their inception. The logical inference which can be gathered from these circumstances would be that the award passed by such an Arbitrator is void ab-initio. The same is non-est in the eyes of law.
9. It is also evident from the material on record and also not disputed from the side of the Respondent Company that the Arbitrator had been appointed by the Management of the Respondent Company unilaterally without seeking consent or approval from the Petitioner.
10. By now, it is very settled law in view of the various pronouncements of the Hon'ble Supreme and the Hon'ble High Courts that the awards passed by the unilaterally appointed Arbitrators are non-est in the eyes of law and would not survive the challenge u/s 34 of the Arbitration and Conciliation Act, 1996 for the reason that they lack inherent jurisdiction to conduct the proceedings.
11. In Perkins Eastman Architects DPC & Anr. Vs. HSCC (India) Ltd. (2019) 17 S.C.R. 275, it was held by the Apex OMP (COMM.) 15/2022 Page no.6/10 Pawan Kumar v. Shriram Transport Finance Co. Ltd. & Anr. Court that in a case where only one party has a right to appoint a Sole Arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. It was further held that a person who has an interest in the outcome or decision of the dispute must not have the power to appoint a Sole Arbitrator and that has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 and recognized by the decision of the Court in TRF Ltd. Vs. Energo Engineering Projects Limited (2017) 7 S.C.R. 409.
12. The Hon'ble Supreme Court, again in case Bharat Broadband Network Ltd. Vs. United Telecoms Ltd. (2019) 6 S.C.R. 97 held that a unilaterally appointed Arbitrator is de jure ineligible to perform his functions and his mandate is automatically terminated u/s 14 (1) (a) of the Act. Further, any prior agreement to do away with this ineligibility would be wiped out by the non-obstante clause contained in Section 12 (5) of the Act and the same can be cured only through an express waiver.
13. In Ram Kumar & Ors. Vs. Shriman Transport Finance Co. Limited reported as MANU/DE/4941/2022, the Hon'ble High Court has observed as under:-
"8. Clearly, an award rendered by a person who is ineligible to act as an arbitrator would be of little value; it cannot be considered as an arbitral award under the A&C Act. While it is permissible for the parties to agree to waive the ineligibility of an arbitrator, the proviso to Section 12(5) of the A&C Act makes it clear that such an agreement requires to be in writing. In Proddatur Cable TV Digi Services v. Siti Cable OMP (COMM.) 15/2022 Page no.7/10 Pawan Kumar v. Shriram Transport Finance Co. Ltd. & Anr.
Network Limited: (2020) 267 DLT 51, the learned Single Judge of this Court, following the decision in TRF Ltd. v. Energo Engineering Projects Ltd. (supra) and Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (supra), held that unilateral appointment of an arbitrator by a party is impermissible."
14. The Calcutta High Court in Cholamandalam Investment and finance Company Ltd. Vs. Amarpali Enterprises and Anr., EC No. 122/2022 decided on 14.03.2023, has analyzed all the above Judgements as well as some other relevant pronouncements on the said issue and has laid down following principles:-
"(a) As held in HRD Corp (supra), arbitrators falling under Schedule VII of the Act are ineligible as they lack inherent jurisdiction. Such ineligibility was extended to persons appointed by persons falling under Schedule VII of the Act in TRF Limited (supra). This ineligibility was ultimately extended to persons who are unilaterally appointed by one of the parties to the arbitration in Perkins (supra).
(b) The Apex court has judicially expanded the Schedule VII of the Act to include persons unilaterally appointed by one of the parties vide its judgement in Perkins (supra) and/or persons appointed by persons falling under Schedule VII of the Act vide its judgement in TRF Limited (supra).
(c) It is a settled principle of law that compliance with Section 12(5) read with Schedule VII is sine qua non for any arbitral reference to gain recognition and validity before the Courts. An arbitral reference which begins with an illegal act vitiates the entire arbitral proceedings from its inception and the same cannot be validated at any later stage. Thus, it would be a logical inference to consider such arbitral proceedings as void ab initio.
(d) Awards passed by a unilaterally appointed arbitrator are non- est in the eyes of law. While Section 47 of the CPC is not directly applicable, guidance has to be sought from the jurisprudence of the Apex Court vis-à-vis decrees passed while lacking inherent jurisdiction. Such decrees do not exist in the eyes of law and similarly awards passed while lacking inherent jurisdiction can be said to have never existed.
Therefore, the parties would be free to re-agitate the matter.
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e) This judgement is applicable to awards wherein the arbitral proceeding commenced post the 2015 amendment to the Act. It does not deal with proceedings having been initiated pre the 2015 amendment and concluding post the 2015 amendment".
(Emphasis supplied).
15. It would also be profitable to reproduce following observations of the Calcutta High Court in the same Judgment:-
"23. The law of arbitration is an alternative dispute resolution mechanism that was brought into the statute books in order to facilitate a quick and efficient method of dispute resolution. The raison d'être of arbitration is to provide liberty to parties wherein they can decide upon various facets of dispute resolution. Ergo, party autonomy is sine qua non of the law of arbitration. However, a virus had emerged wherein finance companies and banks were facilitating appointment of a small cabal of arbitrators in hundreds of cases for themselves. The awards passed were soiled and tainted with bias. It was clear that the borrower was the underdog as he had no choice in the matter of appointment of arbitrator and the very concept of impartiality was given a go bye. In order to overcome this issue, the legislative amendments of 2015 and the judicial pronouncements on such amendments by the Apex Court have brought in a level playing field so that no party could have a higher bargaining power in the decision making process for appointment of an arbitrator. Such interpretation, as discussed above, has ensured complete impartiality in such appointments and served the intended purpose of saving the 'small guy' while counter-balancing party autonomy. In conclusion, one may say that the apparent impartiality that existed providing power to one of the parties to choose the arbitrator unilaterally has been taken away as the same was fraught with inequalities at the very threshold of the initiation of the arbitration proceedings. However, the proviso to Section 12(5) of the Act allows for waiver but clarifies that the same has to be explicit and in writing".
(Emphasis supplied)
16. Thus, it palpably clear that the awards passed by the unilaterally appointed Arbitrators are non-est in the eyes of law OMP (COMM.) 15/2022 Page no.9/10 Pawan Kumar v. Shriram Transport Finance Co. Ltd. & Anr. and cannot be considered as an Arbitral Award under the Arbitration and Conciliation Act, 1996 for the reason that the unilateral appointment of the Arbitrators is illegal and defeats very purpose of unbiased and impartial adjudication of the disputes between the parties. Awards passed by such unilaterally appointed Arbitrators will not survive the challenge u/s 34 of the Act.
17. In the instant case, as already noted hereinabove, the Sole Arbitrator had been appointed by the Respondent no.1 unilaterally. At no point of time was the concurrence or the consent of the Petitioners sought for his appointment as nothing has been placed on record by the respondent no.1 in this regard. On this score also, the impugned arbitral award passed by the Sole Arbitrator becomes non-est in eyes of law and cannot survive the challenge u/s 34 of Arbitration and Conciliation Act, 1996.
18. Hence, the petition is allowed and the impugned arbitral award dated 25.02.2015 is hereby set-aside.
19. File be consigned to Record Room after necessary compliance.
Announced in the open court (GORAKH NATH PANDEY) on 01st February, 2024. District Judge (Commercial Court) North:Rohini:Delhi/01.02.2024 OMP (COMM.) 15/2022 Page no.10/10 Pawan Kumar v. Shriram Transport Finance Co. Ltd. & Anr.