Gujarat High Court Invalidates Arbitral Awards Due To Unilateral Arbitrator Appointment By NBFCs

In a pivotal ruling, the Gujarat High Court has quashed and nullified three arbitral awards where non-banking financial companies (NBFCs) unilaterally appointed sole arbitrators. The court's decision was in line with the Apex Court's stance on Section 12(5) of the Arbitration and Conciliation Act, 1996.Justice Bhargav D Karia observed, “Thus, the Hon’ble Apex Court has held that a person having an interest in a dispute or in the outcome thereof is ineligible not only to act as an arbitrator but is also rendered ineligible to appoint anyone else as an arbitrator. It is an admitted position in each of the petition that the arbitration clause gave power and authority to the respondent NBFC unilaterally to appoint the sole arbitrator and accordingly the Sole Arbitrator was appointed unilaterally which is contrary to the decision of the Apex Court in the context of Section 12(5) of the Act read with Seventh Schedule thereof.”“Therefore, even though the petitioners are required to challenge the award under Section 34 of the Act, the petitioners have been able to show exceptional circumstances and bad faith on the part of respondent NBFC to invoke the remedy under Article 226 and 227 of the Constitution of India whose ambit is broad and pervasive,” Justice Karia further observed. Placing reliance on Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd., (2022) I SCC 75, the Court asserted that thus in the exceptional circumstances as emerging from the facts of these petitions, these petitions were entertained instead of relegating the petitioners to avail appropriate remedy under Section 34 of the Act.The above ruling came in a petition whereby the petitioners had challenged the awards passed by the Sole Arbitrator appointed by the respondent no.1 - NBFC, on the ground that the arbitration awards were passed ex parte by the Sole Arbitrator and Sole Arbitrator could not have been unilaterally appointed by the respondent no.1 as per the settled legal position.The petitioners claimed that they had received financial assistance from the respondent NBFC but were unable to repay the outstanding amount. Consequently, the respondent initiated arbitration proceedings by appointing a Sole Arbitrator to resolve the dispute between the parties.In the course of the arbitration, the Sole Arbitrator issued a notice in three Special Civil Applications. However, the validity of this notice was contested in Special Civil Application no.17868 of 2022. Given the common jurisdictional issue concerning the authority of the Sole Arbitrator in all the petitions, the court decided to hear them collectively. Subsequently, a joint court order was issued to dispose of these cases. The Court noted that there was only a flagrant violation of principle of natural justice as also certain procedural infirmities as to the manner in which the arbitrator conducted the proceedings and pronounced the impugned awards. The Court further noted that it also emerged from the record that the manner in which the arbitrator proceeded in the matter indicating that proper opportunity was not granted to the petitioners to lead evidence particularly in the backdrop of the admitted position on perusal of the impugned awards, the issues were not framed during the Arbitral Proceedings, nor any reasons were assigned for coming to conclusion to award the claim amount.Thus, the Court concluded that it was evident from the very inception i.e. from the stage of appointment of the sole arbitrator that the proceedings were vitiated and the impugned ex parte arbitral awards are therefore rendered unsustainable. “The impugned awards are therefore liable to be quashed and set aside with a liberty to the respondent NBFC to initiate fresh proceedings in accordance with the settled legal position as held by the Hon’ble Division Bench of this Court in case of Pahal Engineers (Supra) by appointing the arbitrator either with the consent of the petitioners or by approaching this Court under Section 11 of the Act,” the Court said quashing and setting aside all three Special Civil Applications with a liberty to the respondent NBFC to initiate the Arbitration Proceedings in accordance with law and settled legal position. Appearance: Mr Vishwas K Shah For Ms Bhavna V Shah(11047) For The Petitioner(S) No. 1,2,3 For The Respondent(S) No. 2 Mr Yash Jain For Mr Rituraj M Meena(3224) For The Respondent(S) No. 1LL Citation: 2023 Livelaw (Guj) 171Case Title: M/S Rich And Royal Through Its Proprietor Mr. Ravindrabhai Rameshbhai Gamit Versus Authorised Officer , Hinduja Leyland Finance Ltd. Case No.: R/Special Civil Application No. 728 Of 2023Click Here To Read/Download Judgement

Gujarat High Court Invalidates Arbitral Awards Due To Unilateral Arbitrator Appointment By NBFCs

Bhavya Singh

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