Delhi District Court
M/S. Lotus Education & Ors. vs . Aakash Educational Services Ltd. & ... on 15 April, 2023
DLCT010022142020
IN THE COURT OF SH. SANJEEV KUMAR AGGARWAL :
DISTRICT JUDGE (COMMERCIAL) -01 : CENTRAL, TIS
HAZARI COURTS, DELHI
OMP (Com.) No. 27/2020
1. M/s. Lotus Education,
Ground, First and Second Floor,
Krishna Tower, Plot No. 1352,
Piprali Road, Sikar, Rajasthan.
2. Sh. Pawan Agarwal,
S/o Late Sh. Amrit Lal Ji Khemka,
R/o 4-A-5, R.C. Vyas Colony,
Ward No. 43, Bhilwara
Rajasthan - 311001.
3. Sh. Harish Agarwal,
S/o Late Sh. Amrit Lal Ji Khemka,
R/o 2-Q-8, R.C. Vyas Colony,
Ward No. 43, Bhilwara,
Rajasthan - 311001.
Also at :
Ground, First and Second Floor,
Krishna Tower, Plot No. 1352,
OMP (Com.) No. 27/2020 Page No. 1 of 23
M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr.
Piprali Road, Sikar, Rajasthan.
.... Petitioners.
Versus
1. Aakash Educational Services Ltd.,
Formerly known as Aakash Educational Services Pvt. Ltd.,
Regd. Office at :
Aakash Tower, Plot No. 8,
Pusa Road, Karol Bagh
New Delhi - 110005.
2. Sh. S.C. Rajan,
(Delhi) Sole Arbitrator,
Chamber No. 488, Civil Wing,
Tis Hazari Courts, Delhi - 110054.
.... Respondents.
PETITION UNDER SECTION 34 OF THE ARBITRATION
& CONCILIATION ACT 1996 FOR SETTING ASIDE EX-
PARTE ARBITRATION AWARD DATED 17.10.2019.
Date of Institution : 14.02.2020
Date of reserving Judgment : 28.01.2023
Date of pronouncement : 15.04.2023
ORDER
1. Vide this order, I shall decide the petition moved on behalf of the petitioners under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside the award dated 17.10.2019 in Arbitration Case No. 115/2018 passed by Sh. S.C. Rajan, Retd.
OMP (Com.) No. 27/2020 Page No. 2 of 23M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. Ld. Additional District Judge.
2. Brief facts as stated in the petition are that the respondent No. 1 Aakash Educational Services Ltd. is a company engaged in running business of providing various educational institutions for Aakash Institute/Aakash IIT-JEE/Foundations for student preparing for competitive examinations. The petitioner is a well known business firm of its area and the petitioner was approached by the respondent No.1 for assigning to run coaching institutes by one of the Directors of respondent No. 1 and thereafter, the petitioner and respondent No. 1 entered into two franchise agreements dated 09.09.2016 i.e. one to run coaching institutes for students of XII Board, Medical, IIT/JEE/ Engineering Entrance Examination and another agreement dt. 13.01.2017 for coaching of students appearing in VII, IX and X Board/school/NTSE/Olympiad for making their foundation Strong for appearing in Engineering and Medical Examinations at Sikar, Rajasthan.
3. It is further stated that due to unilateral arbitration decision of respondent No. 1 and other allied issues i.e. quality of faculty and material provided by respondent No. 1, running a center became difficult therefore, application for closure of Sikar franchisee was submitted by the petitioner to the respondent No. 1, however, the respondent No. 1 instead of responding to the request, procured the arbitration award from respondent No. 2. It is further stated that the respondent No. 2 was offered by the respondent No. 1 vide letter dated 04.06.2018 and the same was accepted by respondent No. 2 vide letter dated 07.06.2018, however, no notice of choosing respondent No. 2 as arbitrator was given to the petitioner and the respondents were under legal obligation to inform the name of arbitrator to the petitioner and OMP (Com.) No. 27/2020 Page No. 3 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. the appointment of arbitrator was done by the respondent No. 1 without informing to the petitioner. It is further stated that the respondent No. 2 has conducted more than ten arbitration matters in a year. This fact was never brought to the notice of respondent No. 1 or to the petitioner and in the absence of declaration given under Section 12 and conducting more than ten arbitration matters one after another concurrently for the respondent No. 1 by the respondent No. 2 raises doubt about the fairness of procedure being adopted in the arbitration in question. It is further stated that the arbitration agreement itself is not valid under law as neither the composition of Arbitration Tribunal nor the procedure was in accordance with statute and the proceedings adopted by the respondents is against public policy.
4. It is further stated that the respondent No. 2 has only completed formalities of service to the petitioner as notice was never meant to serve because deliberate mistake was made in the address of the petitioner. It is further stated that the petitioner reached at the given time and place on the designated date but the said premises was found locked and no one was there. The petitioner waited there for a while and then clicked a photograph of locked door and share the same with the respondent No. 1 but to no avail. It is further stated that as per Section 29A period for completion of proceedings is one year but the arbitration proceedings was completed in one and a half year without seeking extension. It is further stated that appointment of Ld. Arbitrator by the respondent No. 1 is contrary to the law of land as given by the Hon'ble Supreme Court in the matter of Perkins Eastman Architects DPC & Anr. Vs. HSCC (India) Ltd. It is further stated that even otherwise no basis has been made out as OMP (Com.) No. 27/2020 Page No. 4 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. to how an amount of Rs. 30 lacs was arrived in stark contrast of the fact in immediate preceding paras the amount has been referred as Rs. 25 lacs which clearly shows that the impugned award has been written with utmost casualness under the direct instructions of respondent No. 1.
5. It is further stated that an amount of Rs. 5,90,694/- has been shown as due from the petitioner however no basis or support of the same has been placed before the Ld. Arbitrator. It is further stated that the petitioners were proceeded ex-parte vide order dated 07.09.2018 however no explanation or reason has been given in the order as to why another notice for hearing on 18.12.2018 was addressed to the petitioner. It is further stated that on 18.12.2018, the premises mentioned in the notice was locked and mail to that effect was sent but was not responded. It is further stated that the Hon'ble High Court has dealt in case of the same respondent in case Vivek Rai Vs. Aakash Institute in OMP No. 561/2014 and has set aside the award thereby observing that the clause mentioned in agreement are against Sections 23 and 28 of the Indian Contract Act and therefore not enforceable. Thus, it is prayed that the arbitration award be set aside.
6. Further, the award was challenged on the following grounds :-
i. Notice of the arbitration award was never served by the respondent No. 1;
ii. The petitioners were never given fair opportunity to represent themselves;
iii. Award passed b the arbitrator is without any basis OMP (Com.) No. 27/2020 Page No. 5 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr.
and against set principles of law;
iv. Arbitrator has failed to comply with the provisions of Section 12 of the Act;
v. Award has been obtained on the basis of fabricated documents;
vi. Arbitrator has failed to support its decision with reasons as required under Section 31 (3) of the Act;
vii. Award is against the public policy of India as the same is induced by fraud;
viii. There is patent illegalities in the form of manipulation of service upon the petitioners;
ix. Arbitrator has failed to take note that the agreement in question contains biased clauses which cannot be enforced.
7. Respondent No. 1 filed reply to the petition in which the respondent No. 1 has stated that an inquiry under Section 340 Cr.PC is required to be initiated because perjury has been committed by the petitioner by stating that no notice was given to the petitioner. Further, it is stated that reply is not maintainable as this court does not sit in appeal while deciding objections under Section 34.
8. On merits, respondent No. 1 has denied the contents of the petition. It is denied by the respondent No. 1 that its Director approached the petitioner for assigning franchisee and it is submitted that it is the petition who approached the respondent No. 1 for franchisee. Further, it is denied that the respondent No. OMP (Com.) No. 27/2020 Page No. 6 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. 1 did not honour the promises and stated that vague allegations have been raised. Further, it is stated that vide letters dated 19.02.2018 and 07.03.2018, petitioners unequivocally admitted the financed irregularities at the franchisee center and operational failure to run the franchisee center seeking closure of center and in the said letters, no allegation was made as made in the petition. Further, it is stated that the necessary declaration as required under the law was made by respondent No. 2 on 20.6.2018 itself and further, it is stated that despite knowledge of proceedings, petitioners did not join the proceedings and failed to raise objections within the limitation period. Further, it is denied that the premises was locked on 18.12.2018 when the petitioner reached the premises and further stated that the petitioner was well aware of next date of hearing i.e. 15.1.2019 but he failed to join proceedings on that day and deliberately avoiding filing objections as stated in letter dated 28.10.2018. It is stated that respondents were under no obligation to share copy of order with absentee petitioner and therefore, it is denied that requirement of due service was manipulated. Further, it is stated that as per the Judgment of Perkins (supra.) does not apply to the present case as Perkins Judgment is prospective and the petitioner did not raise the same issue on same ground at the time of appointment of respondent No. 2 and thereby waived its right to object. Further, it is denied that the award passed is liable to be set aside being arbitrary, unfair or partial.
9. It is further stated that the fact of matter is that compensation of Rs. 25 lacs was applicable if the franchisee wish to exit from the franchisee agreement however, in the present case, the petitioner No. 1 terminated both the franchisee OMP (Com.) No. 27/2020 Page No. 7 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. agreements therefore, as per applicable clause 5.3 and 5.5 of the agreements, petitioner was liable to pay Rs. 15 lacs for each agreement therefore respondent No. 2 has legally and rightly allowed compensation of Rs. 30 lacs. Further, it is denied that no basis or support of claim of Rs. 7,74,236/- was placed before the arbitrator. It is further denied that audit report fails to point out that audit was done for which of the coaching classes or the documents had seen light of the day for first time before arbitrator only. It is stated that after letter dated 7.3.2018, the petitioner abruptly closed the franchisee center and ran away and before invocation two letters were issued to petitioner in the month of April however, the petitioner did not comply with the same.
10. Respondent No. 1 has also denied all the grounds taken for setting aside the award and prays for dismissal of the petition.
11. Notice of the petition was also issued to the respondent No. 2 to file award proceedings and arbitration proceedings was filed on behalf of respondent no. 2 / Ld. Arbitrator by his clerk as it is stated that Ld. Arbitration Sh. S.C. Rajan has expired.
12. Arguments were heard from Sh. Amit Kumar, Ld. Counsel for the petitioners and Sh. Bhaskar Kumar Shukla, Ld. Counsel for the respondent.
13. It is argued by Ld. Counsel for the petitioners that one of the major ground for setting aside the award is that the appointment of arbitrator was unilateral as no consent of the petitioners was obtained before appointment of arbitrator. Ld. Counsel for petitioners argued that Ld. Arbitrator has not complied with the provisions of Section 12(5) in letter & spirit as OMP (Com.) No. 27/2020 Page No. 8 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. he has not disclosed in how many cases he was earlier appointed as arbitrator.
14. On the other hand, Ld. Counsel for the respondent No. 1 has argued that since notice was issued to the petitioner for appointment of arbitrator but no reply was given by the petitioners therefore, respondent No. 1 has appointed Sh. S.C. Rajan as Arbitrator and petitioner has raised no objection for said appointment therefore, the petitioner cannot be allowed to raise objections regarding appointment of arbitrator.
15. I have considered the submissions and have gone through the record. Ld. Arbitrator has passed the award ex-parte granting Rs. 35,90,694/- as outstanding amount towards the compensation of the business, pecuniary and reputational losses alongwith interest @8% p.a. on the said amount. Further, a sum of Rs. 35,000/- has also been awarded to the claimant as cost and litigation expenses.
16. An award can be set aside on following grounds as prescribed under Section 34 of the Arbitration and Conciliation Act, 1996 which are as under : -
"34 Application for setting aside arbitral award. --
(1) Recourse to a Court against an arbitral award may be made only by an application for setting aside such award in accordance with sub-section (2) and sub-section (3). (2) An arbitral award may be set aside by the Court only if--
(a) the party making the application furnishes proof that--
(i) a party was under some incapacity, or
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law for the time being in force; or
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or
(iv) the arbitral award deals with a dispute not contemplated OMP (Com.) No. 27/2020 Page No. 9 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr.
by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration:
Provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the arbitral award which contains decisions on matters not submitted to arbitration may be set aside; or
(v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Part from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Part; or
(b) the Court finds that--
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force, or
(ii) the arbitral award is in conflict with the public policy of India.
Explanation. --Without prejudice to the generality of sub- clause (ii) it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption or was in violation of section 75 or section 81.
17. Hon'ble Supreme Court has given broad principles on which an award can be set aside in Delhi Airport Metro Express Pvt. ... vs Delhi Metro Rail Corporation Ltd. SCC Online SC 695 as under:
23. For a better understanding of the role ascribed to courts in reviewing arbitral awards while considering applications filed under Section 34 of the 1996 Act, it would be relevant to refer to a judgment of this Court in Ssangyong Engineering and Construction Company Limited v. National Highways Authority of India (NHAI) 5 wherein R.F. Nariman, J. has in clear terms delineated the limited area for judicial interference, taking into account the amendments brought about by the 2015 Amendment Act. The relevant 2 (2020) 2 SCC 455 3 2021 SCC OnLine SC 8 4 (2012) 5 SCC 306 5 (2019) 15 SCC 131 passages of the judgment in Ssangyong (supra) are noted as under: -
"34. What is clear, therefore, is that the expression "public policy of India", OMP (Com.) No. 27/2020 Page No. 10 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. whether contained in Section 34 or in Section 48, would now mean the "fundamental policy of Indian law" as explained in paras 18 and 27 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49: (2015) 2 SCC (Civ) 204] i.e. the fundamental policy of Indian law would be relegated to "Renusagar" understanding of this expression. This would necessarily mean that Western Geco [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] expansion has been done away with. In short, Western Geco [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] ,as explained in paras 28 and 29 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , would no longer obtain, as under the guise of interfering with an award on the ground that the arbitrator has not adopted a judicial approach, the Court's intervention would be on the merits of the award, which cannot be permitted post amendment.
However, insofar as principles of natural justice are concerned, as contained in Sections 18 and 34(2)(a)(iii) of the 1996 Act, these continue to be grounds of challenge of an award, as is contained in para 30 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] .
35. It is important to notice that the ground for interference insofar as it concerns "interest of India" has since been deleted, and therefore, no longer obtains. Equally, the ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the "most basic notions of morality or justice". This again would be in line with paras 36 to 39 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , as it is only such arbitral awards that shock the conscience of the court that can be set aside on this ground.
36. Thus, it is clear that public policy of India is now constricted to mean firstly, that a domestic award is contrary to the fundamental policy of Indian law, as understood in paras 18 and 27 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49: (2015) 2 SCC (Civ) 204], or secondly, that such award is against basic notions of justice or morality as understood in paras 36 to 39 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] .
Explanation 2 to Section 34(2)(b)(ii) and Explanation 2 to Section 48(2)(b)
(ii) was added by the Amendment Act only so that Western Geco [ONGC v. Western Geco International Ltd., (2014) 9 SCC 263 : (2014) 5 SCC (Civ) 12] ,as understood in Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , and paras 28 and 29 in particular, is now done away with.
OMP (Com.) No. 27/2020 Page No. 11 of 23M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr.
37. Insofar as domestic awards made in India are concerned, an additional ground is now available under sub-section (2-A), added by the Amendment Act, 2015, to Section 34. Here, there must be patent illegality appearing on the face of the award, which refers to such illegality as goes to the root of the matter but which does not amount to mere erroneous application of the law. In short, what is not subsumed within "the fundamental policy of Indian law", namely, the contravention of a statute not linked to public policy or public interest, cannot be brought in by the backdoor when it comes to setting aside an award on the ground of patent illegality.
38. Secondly, it is also made clear that reappreciation of evidence, which is what an appellate court is permitted to do, cannot be permitted under the ground of patent illegality appearing on the face of the award.
39. To elucidate, para 42.1 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , namely, a mere contravention of the substantive law of India, by itself, is no longer a ground available to set aside an arbitral award. Para 42.2 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , however, would remain, for if an arbitrator gives no reasons for an award and contravenes Section 31(3) of the 1996 Act, that would certainly amount to a patent illegality on the face of the award.
40. The change made in Section 28(3) by the Amendment Act really follows what is stated in paras 42.3 to 45 in Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , namely, that the construction of the terms of a contract is primarily for an arbitrator to decide, unless the arbitrator construes the contract in a manner that no fair- minded or reasonable person would; in short, that the arbitrator's view is not even a possible view to take. Also, if the arbitrator wanders outside the contract and deals with matters not allotted to him, he commits an error of jurisdiction. This ground of challenge will now fall within the new ground added under Section 34(2-A).
41. What is important to note is that a decision which is perverse, as understood in paras 31 and 32 of Associate Builders [Associate Builders v. DDA, (2015) 3 SCC 49 : (2015) 2 SCC (Civ) 204] , while no longer being a ground for challenge under "public policy of India", would certainly amount to a patent illegality appearing on the face of the award. Thus, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality. Additionally, a finding based on documents taken behind the back of the parties by the arbitrator would also qualify as a decision based on no evidence inasmuch as such decision is not OMP (Com.) No. 27/2020 Page No. 12 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. based on evidence led by the parties, and therefore, would also have to be characterised as perverse."
24. This Court has in several other judgments interpreted Section 34 of the 1996 Act to stress on the restraint to be shown by courts while examining the validity of the arbitral awards. The limited grounds available to courts for annulment of arbitral awards are well known to legally trained minds. However, the difficulty arises in applying the well-established principles for interference to the facts of each case that come up before the courts. There is a disturbing tendency of courts setting aside arbitral awards, after dissecting and reassessing factual aspects of the cases to come to a conclusion that the award needs intervention and thereafter, dubbing the award to be vitiated by either perversity or patent illegality, apart from the other grounds available for annulment of the award. This approach would lead to corrosion of the object of the 1996 Act and the endeavours made to preserve this object, which is minimal judicial interference with arbitral awards. That apart, several judicial pronouncements of this Court would become a dead letter if arbitral awards are set aside by categorising them as perverse or patently illegal without appreciating the contours of the said expressions.
25. Patent illegality should be illegality which goes to the root of the matter. In other words, every error of law committed by the Arbitral Tribunal would not fall within the expression 'patent illegality'. Likewise, erroneous application of law cannot be categorised as patent illegality. In addition, contravention of law not linked to public policy or public interest is beyond the scope of the expression 'patent illegality'. What is prohibited is for courts to re-appreciate evidence to conclude that the award suffers from patent illegality appearing on the face of the award, as courts do not sit in appeal against the arbitral award. The permissible grounds for interference with a domestic award under Section 34(2-A) on the ground of patent illegality is when the arbitrator takes a view which is not even a possible one, or interprets a clause in the contract in such a manner which no fair- minded or reasonable person would, or if the arbitrator commits an error of jurisdiction by wandering outside the contract and dealing with matters not allotted to them. An arbitral award stating no reasons for its findings would make itself susceptible to challenge on this account. The conclusions of the arbitrator which are based on no evidence or have been arrived at by ignoring vital evidence are perverse and can be set aside on the ground of patent illegality. Also, consideration of documents which are not supplied to the other party is a facet of perversity falling within the expression 'patent illegality'.
OMP (Com.) No. 27/2020 Page No. 13 of 23M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr.
26. Section 34 (2) (b) refers to the other grounds on which a court can set aside an arbitral award. If a dispute which is not capable of settlement by arbitration is the subject-matter of the award or if the award is in conflict with public policy of India, the award is liable to be set aside. Explanation (1), amended by the 2015 Amendment Act, clarified the expression 'public policy of India' and its connotations for the purposes of reviewing arbitral awards. It has been made clear that an award would be in conflict with public policy of India only when it is induced or affected by fraud or corruption or is in violation of Section 75 or Section 81 of the 1996 Act, if it is in contravention with the fundamental policy of Indian law or if it is in conflict with the most basic notions of morality or justice. In Ssangyong (supra), this Court held that the meaning of the expression 'fundamental policy of Indian law' would be in accordance with the understanding of this Court in Renusagar Power Co. Ltd. v. General Electric Co.6 In Renusagar (supra), this Court observed that violation of the Foreign Exchange Regulation Act, 1973, a statute enacted for the 'national economic interest', and disregarding the superior courts in India would be antithetical to the fundamental policy of Indian law. Contravention of a statute not linked to public policy or public interest cannot be a ground to set at naught an arbitral award as being discordant with the fundamental policy of Indian law and neither can it be brought within the confines of 'patent illegality' as discussed above. In other words, contravention of a statute only if it is linked to public policy or public interest is cause for setting aside the award as being at odds with the fundamental policy of Indian law. If an arbitral award shocks the conscience of the court, it can be set aside as being in conflict with the most basic notions of justice. The ground of morality in this context has been interpreted by this Court to encompass awards involving elements of sexual morality, such as prostitution, or awards 6 1994 Supp (1) SCC 644 seeking to validate agreements which are not illegal but would not be enforced given the prevailing mores of the day.
18. Now reverting back to the case. From the arbitration proceeding I found the photocopy of letter/ Notice dt. 19.05.2018 written by respondent no.1 invoking arbitration and nominating Sh. S.C Rajan /respondent no.2 as Arbitrator. Further I also found the photocopy of letter dt. 04.06.018 send by respondent to Sh. S.C. Rajan appointing him as Arbitrator. From both this letter it is evident that respondent no.1 unilaterally appointed respondent no. 2 as arbitrator without obtaining express consent of the petitioners. From the clause 8.2 of franchise agreement entered between petitioners and respondent no. 1 dated 01.02.2016 it is evident that arbitrator is to be appointed by Chairman of the respondent no. 1 company. Hence it appears that using the said OMP (Com.) No. 27/2020 Page No. 14 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. clause Chairman of the respondent no.1 company has appointed Late Sh. S.C. Rajan as sole Arbitrator without obtaining consent of the petitioners herein. Even if I presume that the letter dated 19.05.2018 sent by respondent no.1 regarding nominating Sh. S.C. Rajan as sole Arbitrator has been delivered to the petitioner (though as per objection u/s 34 file by petitioner no notice of appointment of Arbitrator was given to petitioner. On perusal of entire arbitration file, I found that no document has been placed on record by the respondent regarding delivery of said letter to the petitioner) and petitioners have not responded to the same, the respondent No. 1 cannot appoint the arbitrator unilaterally on its own and has to proceed to appoint arbitrator as per procedure provided in section 11 of the Arbitration and Conciliation Act. Hence, appointment of Sh. S.C. Rajan as arbitrator by chairman of respondent no. 1 was unilateral. It has now remain no res integra that unilateral appointment of arbitrator is illegal and same is liable to be set aside. In this regard, I rely upon the recent Judgment passed in the matter of CHOLAMANDALAM INVESTMENT AND FINANCE COMPANY LTD. VERSUS AMRAPALI ENTERPRISES AND ANR EC 122 of 2022 dt.
March 14th, 2023, Hon'ble Calcutta High Court, wherein Hon'ble High Court even refused to execute the award by hold- ing that an award passed the by Ld. Arbitrator who was ap- pointed unilaterally is nullity. In this case Hon,ble High Court discussed various citations related to unilateral appointment of Arbitrator. Relevant para is reproduced as below:
6. Firstly, in the case of HRD Corporation -vs- GAIL reported in (2018) 12 SCC 471 [Coram: R.F.Nariman and S.K. Kaul, JJ.], the Apex Court ruled that when a person directly falls under Schedule VII, ineligibility goes to the root of the appointment as per prohibition under Section 12(5) read with OMP (Com.) No. 27/2020 Page No. 15 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr.
Schedule VII. Such person lacks inherent jurisdiction. Thereafter, in TRF Limited -vs- Energo Engineering Projects Limited reported in [2017] 7 S.C.R. 409 [Coram: Dipak Misra and A.M. Khanwilkar, JJ.], the Apex Court expanded the approach in HRD Corporation (supra) and held that an individual who himself is ineligible under the provisions of the Act to be appointed as an arbitrator, cannot nominate a sole arbitrator. The ineligibility goes to the root of the matter and arises out of lack of inherent jurisdiction. The relevant paragraph penned down by J. Nariman in HRD Corporation (supra) is enumerated below for reference :-
"57. 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. Subsequently, in Perkins Eastman Architects DPC & Anr. -vs- HSCC (India) Ltd. reported in [2019] 17 S.C.R. 275 [U.U. Lalit and Indu Malhotra, JJ.] the Supreme Court extended the approach taken in TRF Limited (supra) and held that a party who has an interest in the outcome of a dispute also cannot nominate a sole arbitrator. The relevant portion of eloquent exposition penned by U.U. Lalit, J. is extracted below :-
"15. ....... We thus have two categories of cases. The first, similar to the one dealt with in TRF Ltd. where the Managing Director himself is named as an OMP (Com.) No. 27/2020 Page No. 16 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the Managing Director is not to act as an arbitrator himself but is empowered or authorised to appoint any other person of his choice or discretion as an arbitrator. If, in the first category of cases, the Managing Director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be the test, similar invalidity would always arise and spring even in the second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases. We are conscious that if such deduction is drawn from the decision of this Court in TRF Ltd., all cases having clauses similar to that with which we are presently concerned, a party to the agreement would be disentitled to make any appointment of an arbitrator on its own and it would always be available to argue that a party or an official or an authority having interest in the dispute would be disentitled to make appointment of an arbitrator."
16. But, in our view that has to be the logical deduction from TRF Limited. Paragraph 50 of the decision shows that this Court was concerned with the issue, "whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an Arbitrator"
The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice OMP (Com.) No. 27/2020 Page No. 17 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognised by the decision of this Court in TRF Limited."
Emphasis Added Therefore, the proscription under Section 12(5) read with Schedule VII of the Act was extended to persons unilaterally appointed to act as an arbitrator. Such persons who are unilaterally appointed lack inherent jurisdiction unless an express written approval is given by the parties subsequent to disputes having arisen.
8. Finally, the Supreme Court in Bharat Broadband Network Limited
-vs- United Telecoms Limited reported in [2019] 6 S.C.R. 97 [Coram: R. F. Nariman and Vineet Saran, JJ.] held that a unilaterally appointed arbitrator is de jure ineligible to perform his functions and that his mandate is automatically terminated under Section 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), and the same can be cured only through an express waiver. I have delineated the relevant paragraphs herein below :-
"15. Section 12(5), on the other hand, is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the nonobstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The sub-section then declares that such person shall be "ineligible" to be appointed as arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, in law, is that parties may after disputes have arisen OMP (Com.) No. 27/2020 Page No. 18 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. between them, waive the applicability of this sub-section by an "express agreement in writing". Obviously, the "express agreement in writing" has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the Seventh Schedule."
***
17. The scheme of Sections 12, 13 and 14, therefore, is that where an arbitrator makes a disclosure in writing which is likely to give justifiable doubts as to his independence or impartiality, the appointment of such arbitrator may be challenged under Sections 12(1) to 12(4) read with Section 13. However, where such person becomes "ineligible" to be appointed as an arbitrator, there is no question of challenge to such arbitrator, before such arbitrator. In such a case i.e., a case which falls under Section 12(5), Section 14(1)(a) of the Act gets attracted inasmuch as the arbitrator becomes, as a matter of law (i.e., de jure), unable to perform his functions under Section 12(5), being ineligible to be appointed as an arbitrator. This being so, his mandate automatically terminates, and he shall then be substituted by another arbitrator under Section 14(1) itself. It is only if a controversy occurs concerning whether he has become de jure unable to perform his functions as such, that a party has to apply to the Court to decide on the termination of the mandate, unless otherwise agreed by the parties. Thus, in all Section 12(5) cases, there is no challenge procedure to be availed of. If an arbitrator continues as such, being de jure unable to perform his functions, as he falls within any of the categories mentioned in Section 12(5), read with the Seventh Schedule, a party may apply to the Court, which will then decide on whether his mandate has terminated......."
9. In Yashovardhan Sinha and Ors. -vs- Satyatej Vyapaar Pvt. Ltd. reported in 2022(3) CHN (CAL) 305, while analyzing the judicial pronouncements in TRF Limited (supra) and Perkins (supra), I had outlined the following ratio
-
"8.......Therefore, the dicta laid down in these judgments makes it crystal clear that there cannot be unilateral appointment of a sole arbitrator by the respondent as per Clause 19 of the loan agreement as the same is illegal OMP (Com.) No. 27/2020 Page No. 19 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. and defeats the very purpose of unbiased and impartial adjudication of the dispute between the parties. The guiding principle is transparency, fairness, neutrality and independence in the selection process and hence, appointment of a sole arbitrator can either be with mutual consent of parties or by an order of the competent court. There can be no third way."
10. Similarly in B.K. Consortium Engineers Private Limited -vs- Indian Institute of Management, Calcutta reported in (2023 SCC OnLine Cal 124), I had the occasion to examine the importance of independence and neutrality of the arbitral tribunal wherein I had expressed the following observations -
"8. In the light of the apex court's pronouncements in Perkins Eastman Architects DPC & Another v. HSCC (India) Ltd. reported in [2019] 17 S.C.R. 275 and TRF Ltd. v. Energo Engineering Projects Ltd. reported in [2017] 7 S.C.R. 409, it is crystal clear that unilateral appointment of an arbitrator by a party who has some sort of interest in the final outcome or decision is not permissible. The cardinal importance of the independence and neutrality of the arbitral tribunal has been reiterated by the Supreme Court on multiple occasions. For arbitration to be seen as a viable dispute resolution mechanism and as an alternate recourse to litigation, the independence of arbitration process outside the purview of undue influence and favor needs to be ensured in both letter and spirit. and in case of non- adherence to such principles, the courts must step in. If one takes a careful look, the very basic essence of the principle laid down in the above- mentioned case laws is the natural justice principle of nemo judex in causa sua that is 'no one should be made a judge in his own case'. For arbitration decisions to be respected and accepted as decrees of the court, a similar level of integrity in the appointment of arbitrators must be ensured."
11. In light of the aforementioned judicial precedents, it can be said with unambiguous certainty that the unilateral appointment of Mr. Soma Kar Ghosh by the award holder is illegal and void. However, what still remains to be determined is the impact of the aforesaid illegality on the arbitral award and the present execution petition.
12. In Ram Kumar and Ors. -vs- Shriram Transport Finance Co. Limited reported in MANU/DE/4941/2022 [Coram: Vibhu Bakhruand Amit OMP (Com.) No. 27/2020 Page No. 20 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. Mahajan, JJ.] a division bench of the Delhi High Court, while adjudicating a Section 34 challenge to an arbitral award passed by a unilaterally appointed arbitrator, held that an arbitral award passed by a person ineligible to act as an arbitrator cannot be considered as an arbitral award under the provisions of the Act. The relevant portion has been reproduced below -
"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 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."
13. In a similar fashion, in JV Engineering Associate, Civil Engineering Contractors -vs- General Manager, CORE reported in 2020 SCC OnLine Mad 4829, the Madras High Court dealt with the validity of an arbitral award passed by an ineligible arbitrator. P.T. Asha, J., concluded as follows :-
"31. In the above circumstances the Award in question having been passed by an Arbitrator who is ineligible to be an Arbitrator deserves to be set aside more particularly since there is no express waiver in writing as contemplated under the proviso to Section 12(5)."
14. Likewise, the Bombay High Court in Naresh Kanyalal Rajwani -
vs- Kotak Mahindra Bank reported in 2022 SCC OnLine Bom 6204, was dealing with effect of unilateral appointments on an arbitral award. Manish Pitale, J., remarked the following :-
"23. Therefore, it becomes evident that in the present case, from the very inception, i.e. from the stage of appointment of the Arbitrator, the OMP (Com.) No. 27/2020 Page No. 21 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. proceedings were vitiated and the arbitral award was therefore, rendered unsustainable. This Court is inclined to allow the petition only on the aforesaid ground."
19. Further, recently in Ruia Exports & Anr vs Moneywise Financial Services O.M.P. (COMM) 16/2020 & I.A. 438/2020 & I.A. 440/2020 decided on 23 March, 2022 while relying upon the perkins Judgment (supra) it was held that unilateral appointment of Arbitrator by a party is a nullity.
20. In view of the aforesaid facts and circumstances, the award is liable to be set aside as the appointment of arbitrator was unilateral and thus not as per the Indian law pronounce by the Hon'ble Supreme Courts and Hon'ble High Court in aforesaid cases and thus award is against public policy and is patently illegal.
21. Further, I am agree with the submission of Ld. Counsel for petitioner that Ld. Arbitrator has though gave declaration u/s 12 (5) of Arbitration Act but he has not complied the provision of section 12 of Arbitration Act in letter and spirit as he has not declared in terms of seventh schedule. He has not declare how many matters he was earlier appointed Arbitrator by the respondent. If a person is repeatedly appoint as arbitrator by a party then that person definitely have financial interest and there is every apprehension that he will be biased towards the parties who repeatedly appoint him as Arbitrator and he will also have fear that h may not be appointed arbitrator in future by said party if he give award against said party. It is worthwhile to mentioned here that there are four matters pending before this Court related to same parties wherein Late Sh. S.C. Rajan has been appointed as Arbitrator but there is no mentioned in the declaration that he OMP (Com.) No. 27/2020 Page No. 22 of 23 M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr. is appointed arbitrator in other cases by the respondent and further, petitioners have filed list of 7 other cases in which late Sh. S.C. Rajan was appointed as arbitrator. The respondent no. 1 has not controverted the said list, hence it is apparent that late Sh. S.C. Rajan was appointed as arbitrator by the petitioners repeatedly, thus, has developed material financial interest. Further declaration u/s 12(5) given by the Ld. Arbitrator is in ordersheet dt. 20.06.2018. As per ordersheet petitioner was not present at that time. There is no document on arbitration proceeding file that said declaration has been ever communicated to the petitioner by Ld. Arbitrator without communication of the same to petitioners, therefore no use of giving said declaration by ld. Arbitrator. Hence in my view declaration u/s 12 (5) made by Ld. Arbitrator is no declaration. Hence award is patently illegal on the ground of non-compliance of Section 12(5) by Ld. Arbitrator also .
22. In view of the aforesaid discussion I allow the petition / objections raised by the petitioners and set aside the impugned award passed by Ld. Arbitrator Sh. S.C. Rajan/ Ld. Addl. District Judge (retired) dated 17.10.2019 passed in Arbitration Case No. 115/2018.
File be consigned to record room.
Pronounced in open Court on 15.04.2023 (Sanjeev Kumar Aggarwal) District Judge (Commercial Court)-01, Central, Tis Hazari Courts,Delhi.
OMP (Com.) No. 27/2020 Page No. 23 of 23M/s. Lotus Education & Ors. Vs. Aakash Educational Services Ltd. & Anr.