The Delhi High Court has upheld a lower court order refusing to enforce an ex-parte award passed by an arbitrator who was “unilaterally” appointed by a finance company in its dispute with certain individuals.
A bench of Justices Vibhu Bakhru and Amit Mahajan noted that the commercial court had found the arbitrator ineligible under the law barring appointment of certain categories of related persons to the post and said an award passed by an “ineligible arbitrator” is not valid and cannot be enforced.
The court said it found “no infirmity” in the decision of the district judge, Surinder S Rathi, who also deprecated the “age-old law practice” followed by Non-Banking Finance Companies (NBFCs) of unilaterally appointing in-house arbitrators.
“The Learned Commercial Court has held that an award rendered by a person who is ineligible to act as an Arbitrator by virtue of the provisions of Section 12(5) of the A&C (arbitration and conciliation) Act is a nullity and, therefore, cannot be enforced. It has accordingly dismissed the enforcement petition under Section 36 of the A&C Act with the cost quantified as ?25,000. This Court finds no infirmity with the aforesaid view,” said the high court in a recent order.
“A person who is ineligible to act an Arbitrator, lacks the inherent jurisdiction to render an Arbitral Award under the A&C Act. It is trite law that a decision, by any authority, which lacks inherent jurisdiction to make such a decision, cannot be considered as valid. Thus, clearly, such an impugned award cannot be enforced,” the court stated.
Kotak Mahindra Bank Ltd had filed the present appeal before the high court, claiming it was an assignee of D.H. Finance Company, and sought directions to enforce the ex parte arbitral award by an arbitrator who was unilaterally appointed by the company without any recourse or consent of the other parties.
In terms of the arbitral award passed in 2021, a sum of over Rs 4 lakh with interest of 18% per annum was awarded in favour of the D.H. Finance Company.
While also assailing the costs imposed on it by the commercial court, the appellant argued before the high court that the other party was aware of the appointment of the arbitrator and had not raised any objection, and it was thus now precluded from challenging the award.
The court rejected the contention, saying the law which deals with challenge to the appointment of an arbitrator is unambiguous and it was not a case of the other party waiving its right to object.
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District Judge Surinder S Rathi, in his order passed on November 23, 2022, had dismissed Kotak Mahindra Bank’s execution petition in relation to the award.
The judge had said NBFCs, which are important players in the financial infrastructure of a developing nation, should function within the sphere of procedure duly established by law and “never cross the Lakshman Rekha set by governing statutes, bye-laws and binding authoritative judgments”.
“Instead of aligning their Arbitration Agreements/Clauses and Arbitral Practices in consonance with Section 12(5) read with Schedule 7 of Arbitration and Conciliation Act, 1996 post its amendment in 2015, they continued to harp over their age-old law practices of having in-house Unilaterally Appointed Arbitrators,” the judge had said.
