Court’s Decision
The Delhi High Court allowed the petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, and appointed an independent sole arbitrator to adjudicate disputes between the parties. The court emphasized that the unilateral appointment of an arbitrator by one party violates principles of impartiality and fairness established by the Supreme Court.
Detailed Breakdown of the Judgment
Facts
- Loan Agreement and Default:
- A Loan Agreement dated June 29, 2016, was executed between the petitioner and the respondents, whereby ₹25,48,956 was advanced against a mortgaged property in East Rohtash Nagar, Shahdara, New Delhi.
- The respondents defaulted on their equated monthly installments (EMIs), prompting the petitioner to invoke recovery mechanisms under the SARFAESI Act, 2002.
- Recovery Actions:
- On September 24, 2021, the petitioner issued a notice under Section 13(2) of the SARFAESI Act demanding repayment.
- The mortgaged property was subsequently auctioned for ₹27,60,000. However, after adjusting the recovered amount, ₹4,32,512 remained unpaid as a “loss on sale.”
- Attempts at Arbitration:
- The arbitration clause in the loan agreement authorized the petitioner to appoint a sole arbitrator in the event of disputes.
- The petitioner initially appointed a sole arbitrator on December 23, 2023. However, the arbitrator terminated their mandate on January 25, 2024, as the appointment was unilateral.
- After issuing a fresh notice on February 3, 2024, and receiving no response from the respondents, the petitioner filed this petition seeking court intervention.
Issues
- Validity of Unilateral Appointment:
- Could the petitioner unilaterally appoint the sole arbitrator as per the agreement’s arbitration clause?
- Compliance with Service Requirements:
- Did the petitioner satisfy its obligations to notify and serve the respondents as per Section 3 of the Arbitration and Conciliation Act?
Petitioner’s Arguments
- The petitioner contended that the arbitration clause empowered it to appoint the arbitrator unilaterally.
- Despite multiple notices and service attempts, the respondents failed to engage in the arbitration process, justifying the petitioner’s request for the court to appoint an arbitrator.
Respondent’s Arguments
- The respondents did not appear before the court, either to challenge the arbitration proceedings or to defend their position in the matter.
Analysis of the Law
- Unilateral Appointment of Arbitrator:
- The court analyzed the arbitration clause in the agreement and found that it contravened principles of impartiality as upheld in several Supreme Court judgments.
- In Perkins Eastman Architects DPC v. HSCC (India) Ltd., the Supreme Court held that a party with an interest in the outcome of the dispute cannot unilaterally appoint an arbitrator.
- Similarly, TRF Limited v. Energo Engineering Projects Ltd. and Bharat Broadband Network Limited v. United Telecoms Limited reaffirmed the requirement of neutrality in the arbitration process.
- Service of Notice:
- Section 3 of the Arbitration and Conciliation Act deems written communication valid if sent to the respondent’s last known business or mailing address.
- The petitioner provided substantial evidence of its service attempts, including publication in widely circulated newspapers. The court deemed these efforts sufficient to satisfy statutory service requirements.
Precedent Analysis
- SBI General Insurance Co. Ltd. v. Krish Spinning (2024 INSC 532):
- The Supreme Court reinforced the necessity for a fair appointment process in arbitration, emphasizing independence and neutrality.
- Interplay between Arbitration Agreements and the Indian Stamp Act (2023 SCC OnLine SC 1666):
- This judgment clarified procedural requirements for valid arbitration agreements, reinforcing their enforceability.
Court’s Reasoning
- Invalidity of Unilateral Appointments:
- The court found the unilateral appointment provision in the arbitration clause unenforceable. Such appointments inherently lack neutrality, violating principles established in Perkins Eastman and other cases.
- Existence of an Arbitration Agreement:
- The agreement’s arbitration clause unequivocally provided for dispute resolution through arbitration, which the court deemed valid.
- Appointment of Independent Arbitrator:
- Considering the disputes and procedural irregularities in the earlier appointment, the court appointed Mr. Abhishek Mahajan, Advocate, as the sole arbitrator to ensure impartial adjudication.
Conclusion
- The court directed the appointed arbitrator to adhere to disclosure requirements under Section 12 of the Arbitration and Conciliation Act.
- Arbitration costs and fees, as per the Fourth Schedule of the Act, would be shared equally by both parties.
- The arbitrator was entrusted with deciding all claims and counterclaims on their merits.
Implications
- Reinforcement of Neutrality:
- The judgment underscores the necessity of impartiality in arbitration, emphasizing that no party can unilaterally appoint an arbitrator in a manner that undermines fairness.
- Guidance for Financial Institutions:
- Financial entities relying on arbitration clauses must ensure their provisions comply with statutory mandates and judicial precedents to avoid invalidation.
- Judicial Oversight:
- The decision reflects the judiciary’s commitment to upholding principles of fairness in arbitration, ensuring the integrity of the process is maintained.