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HIGH COURT OF DELHI
ATELIER AUTOMOBILES PRIVATE LIMITED AND ORS ..... Petitioners
Through: Mr. Tarun Gupta with Mr. Abhishek Sharma, Advocates.
Through: Ms. Sonam with Mr. Shobhit Jain, Advocates.
JUDGMENT
1. The present petition has been filed under Section 14 and 15 of Arbitration and Conciliation Act, 1996 (herein after called “the Act” ) seeking termination of the mandate of the sole arbitrator, unilaterally appointed by the respondent, with further prayer for substitution of the sole arbitrator appointed by the respondent, by an impartial and independent arbitrator.
2. Petitioner no. 1 is engaged in the business of dealership of Maruti Suzuki India Ltd. at Patiala and Saharanpur, and petitioner nos. 2 to 5 are the directors of petitioner no. 1. Respondent is a nonbanking financial company.
3. A loan agreement was executed between the parties on 14.03.2016, as per which respondent agreed to sanction a loan of Rs.
11.50 crores in favour of the petitioners against mortgage of immovable property situated at Village Megh, Chhapar, Saharanpur, UP. The said loan was repayable in 120 monthly instalments ending on 10.06.2026. Apart from the said loan, another separate loan of Rs.
2.50 crores was also sanctioned in favour of petitioner no. 1 by the respondent.
4. It is the case of the petitioner that petitioner no. 1 regularly paid the instalments towards re-payment of loan. However, due to heavy floods in February, 2018, petitioner no. 1 suffered huge losses on account of its stock worth crores of rupees getting damaged in the floods. Respondent subsequently sent a loan recall notice to the petitioners on 14.10.2019 and also invoked the arbitration clause by way of the said notice.
5. Thereafter, respondent unilaterally appointed an arbitrator, without informing the petitioners or obtaining their consent. The sole arbitrator as unilaterally appointed by the respondent, sent a notice dated 22.02.2021 to the petitioners directing them to appear before him on 17.03.2021 in relation to the claim statement filed by the respondent.
6. It is the case of the petitioners that they came to know about the appointment of the sole arbitrator for the first time only on receipt of the said notice. Thus, petitioners immediately sent a letter to the arbitrator stating that his appointment had been made unilaterally by the respondent without prior notice to the petitioners, without obtaining their consent and was ex-facie illegal and contrary to the law laid down by Apex Court. The learned arbitrator was requested not to proceed further with the arbitration proceedings till the issue regarding his appointment was finalised.
7. However, despite the aforesaid letter, the learned arbitrator proceeded and fixed dates for hearing and sent letter to the petitioners asking them to appear before him. Thus, the present petition has been filed for termination of the mandate of the sole arbitrator.
8. It is the contention on behalf of petitioners that on the one hand the respondent is vigorously pressing the arbitration proceedings, while on the other hand, till date, it continues to receive monthly instalments to the tune of around Rs. 17,00,000/- every month from petitioner no. 1 towards repayment.
9. On behalf of respondent, it is submitted that the appointment of the learned arbitrator in the present case by respondent is proper and as per the loan agreement which was duly executed between the parties. It is submitted by learned counsel for respondent that the appointment is as per law and as per the procedure laid down under Sections 12, 13, 14 and as per 5th, 6th and 7th Schedule of the Act. It is submitted that an impartial and independent arbitrator has been appointed in the present matter, since the arbitrator so appointed by the respondent is a retired Additional District and Sessions Judge, who is also a member of Arbitration Centre of this Court. Additionally, the learned arbitrator has given its disclosure under Section 12 of the Act, which clearly shows that the learned arbitrator does not have any past relation with any of the parties and does not fall under any of the criteria as laid down under 5th, 6th and 7th Schedule of the Act.
10. It is further submitted on behalf of the respondent that in the present case none of the grounds as enumerated in Section 14 of the Act have been satisfied for substitution of the arbitrator. There are no grounds or circumstances that would give rise to justifiable doubts as to the independence or impartiality of the arbitrator.
11. It is the case of the respondent that the present petition is not maintainable. It is contended that on reading of Section 13(4) of the Act, it is clear that if a challenge under any procedure agreed upon by the parties or under the procedure under sub-section (2) is not successful, the arbitral tribunal shall continue the arbitration proceedings and make an arbitral award. It is further stipulated in Section 13(5) of the Act that where an arbitral award is made under sub-section (4), the party challenging the arbitrator may make an application for setting aside such an arbitral award in accordance with Section 34. Thus, it is contended that the scheme of Section 13 of the Act must be read in the context of substantive legislative policy of minimising judicial intervention in arbitral proceedings. Respondent has relied upon the judgment in the case of HRD Corporation Vs GAIL (India) Ltd., 2017(3) Arb. LR 393 (Delhi)/ 2017 SCC OnLine Del 8034 in support of its contentions.
12. Respondent has also contended that the present petition has not been signed, verified and filed by a competent and authorised representative on behalf of company. It is submitted that the entire petition filed before this Court shows that some other person other than the petitioner or authorised representative on behalf of petitioner company, has tried to copy the signature of the petitioner, as the signature present in the loan documents is entirely different from the signature in the present pleading. It is further submitted that the affidavit filed along with the present petition is not as per the law laid down under provisions of CPC and Evidence Act. The affidavit has been stamped with words “presently present at Delhi”, only to show that at the time of attestation of the said affidavit the petitioner was in Delhi. However, the signatures of the deponent mis-match and it seems that attestation was done in the absence of the petitioner.
13. On the other hand, learned counsel for petitioner disputes the submissions made on behalf of respondent and submits that the petition has been filed properly and supported by a duly attested affidavit. Further, on behalf of petitioner, the following judgments are relied upon:-
(i) Perkins Eastman Architects DPC and Another vs HSCC (India)
(ii) TRF Limited Vs Energo Engineering Projects Limited, (2017) 8
(iii) Proddatur Cable TV Digi Services vs Siti Cable Network
14. I have heard learned counsels for the parties and have perused the record.
15. At the outset, it would be useful to note that as per Clause 21 of the said agreement, disputes between the parties have to be resolved through arbitration, to be referred to a sole arbitrator, who was to be appointed by the respondent. Clause 21 containing the arbitration agreement between the parties is reproduced as below:- “21.
ARBITRATION AND JURISDICTION 21.[1] Any and all disputes, claims, differences arising out of or in connection with this Agreement and the Schedule/s attached hereto or the performance of this Agreement shall be settled by arbitration to be referred to a sole arbitrator to be appointed by the RFL and the award thereupon shall be binding upon the Parties to this Agreement. The Arbitration shall be held in accordance with the provisions of the Arbitration and Conciliation Act, 1996 and any statutory amendments thereof. The place of the arbitration shall be in Delhi. The proceeding of Arbitral Tribunal shall be conducted in English language. Each Party shall bear cost of representing the case before the Arbitrator. Costs and charges of Arbitrator to be shared equally unless otherwise provided for in the award. 21.[2] The Borrower(s) further agree that all claims, differences and disputes, arising out of or in relation to dealings/transaction made in pursuant to this Agreement including any question of whether such dealings, transactions have been entered into or not, shall be subject to the exclusive jurisdiction of the Courts at Delhi only.”
16. The issue to be considered in the present case is whether the unilateral appointment by the respondent in the present case is proper and legal. It is no longer res-integra that unilateral appointment of an arbitrator is in the teeth of the law as laid down by Hon’ble Supreme Court in a catena of judgments. It has been held time and again by Supreme Court that unilateral appointment of arbitrator by an authority which is interested in the outcome or decision of the dispute is impermissible in law. In the present case, appointment of the arbitrator having been made unilaterally by the respondent, who is fully interested in the outcome or decision of dispute, thus, is not sustainable.
17. As per settled law, fairness, transparency and impartiality are virtues which are important for effective adjudication of a dispute through arbitration. Applying the yardstick, if the appointing authority of an arbitrator is a head or an employee of a party to the agreement including a company, then its interest in the outcome of the arbitral proceedings is a fact that cannot be denied. Once such an authority or person appoints an arbitrator, as per the law as laid down by Supreme Court, the ineligibility would permeate to the arbitrator so appointed. In the present case, the arbitration clause entitles the respondent to appoint a sole arbitrator. It is beyond a shadow of doubt that the respondent has full interest in the outcome of the arbitral proceedings. Thus, the unilateral appointment of sole arbitrator by the respondent, who is interested in the outcome of the proceedings, cannot be sustained in law.
18. It has been held by Coordinate Bench of this Court that once Managing Director of a company was ineligible to appoint an arbitrator in the light of decision of Supreme Court in the case of Perkins Eastman Architects DPC and Another vs HSCC (India) Ltd., 2019 SCC Online SC 1517, then the same would also bar the company itself from unilaterally appointing the sole arbitrator. Reference in this regard may be made to judgment in the case of Proddatur Cable TV Digi Services vs Siti Cable Network Limited, 2020 SCC Online Del 350, wherein, it has been held as follows:- “23. Thus, following the ratio of the judgment in the case of Perkins (supra), it is clear that a unilateral appointment by an authority which is interested in the outcome or decision of the dispute is impermissible in law. The Arbitration Clause in the present case empowers the company to appoint a Sole Arbitrator. It can hardly be disputed that the „Company‟ acting through its Board of Directors will have an interest in the outcome of the dispute. In the opinion of this Court, the clause is directly hit by the law laid down in the case of Perkins (supra) and the petition deserves to be allowed.
24. The respondent is right in its contention that the autonomy of the parties to the choice of procedure is the foundational pillar of arbitration and that the petitioner had entered into the Distribution Agreement with the Arbitration Clause, out of its free will. The facts in the case of Perkins (supra) were similar where the parties had entered into an agreement in which there was a clause for Dispute Resolution and which empowered the CMD to appoint the Sole Arbitrator. Despite the parties having agreed upon such an Arbitration Clause, the Supreme Court held that the CMD suffered from the disability of appointing the Arbitrator as he was interested in the outcome of the dispute. The underlying principle in arbitration no doubt is party autonomy but at the same time fairness, transparency and impartiality are virtues which are equally important. If the Authority appointing an Arbitrator is the Head or an employee of a party to the agreement then its interest in its outcome is only natural. It goes without saying that once such an Authority or a person appoints an Arbitrator, the same ineligibility would translate to the Arbitrator so appointed. The procedure laid down in the Arbitration Clause cannot be permitted to override considerations of impartiality and fairness in arbitration proceedings.
25. Insofar as the reliance by the respondent on the judgments permitting unilateral appointment by the Authority designate of one party to the agreement is concerned, in my view, the same will have no relevance in view of the judgment of the Supreme Court in the case of Perkins (supra). The argument of the respondent that in the Arbitration Clause before the Supreme Court in the case of Perkins was with regard to the power of a Managing Director to appoint an Arbitrator whereas in the present case it is the Company only merits rejection. First and foremost, one has to see the rationale and the reasoning behind the judgment in the case of Perkins (supra). The Supreme Court held that the Managing Director was ineligible from appointing an Arbitrator on the simple logic that a Managing Director of a Company would always have an interest in the outcome of the arbitration proceedings. The interest in this context takes the shape of bias and partiality. As a natural corollary, if the Managing Director suffers this disability, even if he was to appoint another person as an Arbitrator, the thread of biasness, partiality and interest in the outcome of the dispute would continue to run. Seen in this light, it can hardly be argued that the judgment in Perkins (supra) will not apply only because the designated Authority empowered to appoint an Arbitrator is other than a Managing Director. Moreover, as brought out by the respondent itself, Company here is run by the Board of Directors. The „Board of Directors‟ is defined in Section 2(10) of the Companies Act, 2013 as under: “2(10) “Board of Directors” or “Board”, in relation to a company, means the collective body of the directors of the company.”
26. Thus, the Company is run none other than the Directors collectively. Duties of the Directors have been stipulated in Section 166 of the Companies Act, 2013. A bare perusal of the duties clearly reveals that the Director at all times, has to act in good faith to promote the objects of the Company and in the best interest of the Company, its employees and the shareholders. A Director shall not involve in a situation in which he may have a direct or an indirect interest that conflicts or possibly may conflict with the interest of the Company. It goes without saying that the Directors of the Company as a part of the Board of the Directors would be interested in the outcome of the Arbitration proceedings. The Company therefore, acting through its Board of Directors would suffer the ineligibility under Section 12(5) read with Schedule VII of the Act. The same ineligibility would also apply to any person appointed by the said Company. Thus, in my view, for the purposes of Section 11(6) and Section 12(5) read with Schedule VII, there cannot be a distinction based on the appointing authority being a Company.”
19. Similarly, this Court in the case of M/s Omcon Infrastructure Pvt. Ltd. Vs India Bulls Investment Advisors Ltd., OMP (T) (COMM) 35/2020 held as follows:-
20. Considering the aforesaid, it is clear that the unilateral appointment of the arbitrator by the respondent cannot be sustained in law. There is no denying the fact that independence and impartiality of an arbitrator are hallmarks of any arbitration proceedings. The arbitrator must be independent as well as impartial. Thus, it is held that the arbitration clause authorising the respondent company to appoint the sole arbitrator, is untenable in law. Accordinlgy, the arbitrator as appointed unilaterally by the respondent is declared ineligible to act as an arbitrator.
21. Reliance placed on behalf of the respondent upon Section 13 of the Act is misplaced. It is not necessary for a party to make a challenge under Section 13 of the Act. A petition for terminating the mandate of an arbitrator who is ineligible under Section 12(5) of the Act and for appointment of a substitute arbitrator, would be maintainable. In this regard, reference may be made to the judgment in the case of Bharat Broadband Network Limited Vs United Telecoms Limited, (2019) 5 SCC 755, wherein Hon’ble Supreme Court has held as follows:
22. The contention of respondent as regards the verification of the affidavit, also does not hold any water as there is nothing on record to show that the verification of the affidavit in support of the petition is improper in the present case.
23. In view thereof, the mandate of the sole arbitrator unilaterally appointed by the respondent is hereby terminated. Justice (Retd.) V.K. Jain, a former Judge of this Court, (M): 9650116555 is appointed as the sole arbitrator to adjudicate the disputes that have arisen between the parties.
24. Since the petitioner has indicated that the matter be referred to Delhi International Arbitration Centre (DIAC), the arbitration shall be conducted under the aegis of DIAC.
25. The learned arbitrator shall ensure compliance of Section 12 read with 5th, 6th and 7th Schedule of Arbitration and Conciliation Act, 1996 before commencing the arbitration.
26. The fees of the learned arbitrator shall be in accordance with the schedule of fees prescribed under the Delhi International Arbitration Centre (DIAC) (Administrative Costs and Arbitrators’ fees) Rules,
2018.
27. All rights and contentions of parties are left open for consideration by the learned sole arbitrator.
28. Copy of this order be sent to the learned arbitrator.
29. The present petition is disposed of in the aforesaid terms.
(MINI PUSHKARNA) JUDGE DECEMBER, 2022 c