Gujarat High Court quashes arbitral awards in three cases as arbitrator was appointed unilaterally

The Gujarat High Court recently invoked its jurisdiction under Articles 226 and 227 of the Constitution to set aside arbitral awards in three cases in which the sole arbitrator was appointed unilaterally by non banking financial companies (NBFCs) [M/S Rich and Royal v. Authorised Officer, Hinduja Leyland Finance Ltd]..Justice Bhargav D Karia acknowledged that the petitioners were required to challenge the ex parte arbitration awards before the District Court under Section 34 of the Arbitration and Conciliation Act, 1996.However, the Court entertained the proceedings under Articles 226 and 227 of the Constitution “in view of the settled legal position that the ex parte award passed by the arbitral tribunal is vitiated as no party can be permitted to appoint unilaterally an arbitrator”..The Court noted that the Supreme Court has held that a person having an interest in a dispute or in its outcome is ineligible not only to act as an arbitrator but also to appoint anyone else as arbitrator.In this background, the Court said,“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.”The petitioners had availed financial assistance from the NBFCs and could not repay the outstanding dues leading to initiation of the arbitration. It was argued that arbitrator cannot be appointed without the consent of another party irrespective of any arbitration clause.While entertaining the petitions, the Court found there was not only a flagrant violation of the principles of natural justice but certain procedural infirmities were committed in the manner in which the arbitrator conducted the proceedings..The Court also noted that the arbitrator did not grant proper opportunity to the petitioners to lead evidence, issues were not framed during the proceedings and no reasons were assigned for awarding the claim amount.“The petitioners never participated in the arbitration proceedings and therefore even the provision of Section 4 of the Act, would also not apply which provides for waiver of right to object,” it added.The Court concluded that since the proceedings were vitiated from the very inception, the ex parte arbitral awards are 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,” it ordered.Meanwhile, the Court also quashed a notice issued by the sole arbitrator for initiation of the arbitration proceedings in the fourth case..Advocate Vishwas K Shah represented the petitioners.Advocate Yash Jain, Rituraj M Meena, PM Dave, Aditya P Dave and PR Abhichandani represented different respondents [Read Judgment]