Legal Heirs Saddled With ₹18.95-Crore Liability Without Documents or Hearing; Bombay High Court Finds Ex Parte Arbitral Award Patently Illegal, Sets It Aside
No Hearing Notices After First Date, Yet ₹18.95 Crore Awarded Ex Parte: Bombay High Court Sets Aside Arbitral Award
Facts
The petitioners were the legal heirs of Dinesh Shamji Rita, who died on 6 May 2018. Petitioner No. 1, his widow, had stood as one of the guarantors for a ₹1.50-crore cash-credit facility granted by Lokmanya Multipurpose Co-operative Society Ltd. to the deceased in 2012. Petitioners Nos. 2 to 4 were his children.
The deceased had approached the Society’s Borivali branch for a ₹1.50-crore working-capital facility for his construction business. Petitioner No. 1 and Respondent No. 2 stood as guarantors, and a property at Khar, Mumbai, was mortgaged as additional security.
The dispute arose because the Society subsequently claimed that the total credit facility was ₹4.50 crore, including a further ₹3 crore. The petitioners maintained that the additional ₹3 crore was actually an investment contemplated for a joint venture and that they had neither guaranteed this additional amount nor executed documents extending their liability to it.
In September 2019, the Society demanded approximately ₹15.57 crore and asserted claims over other properties of the deceased. The petitioners denied liability.
Arbitration under Section 84 of the Multi-State Co-operative Societies Act, 2002 followed. The petitioners received the statement of claim but asserted that the supporting documents had not been supplied despite repeated requests. The Society told them to collect those documents from the arbitrator.
The arbitrator ultimately proceeded ex parte and, by award dated 7 March 2022, directed the petitioners and Respondent No. 2 to jointly and severally pay ₹18,95,34,034.10, with 18% annual interest, an additional 2% penal interest and costs.
The legal heirs challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.
Issues
The High Court principally considered whether the Bombay High Court had territorial/supervisory jurisdiction even though the arbitral sittings took place at Belgaum; whether failure to provide the documents relied upon by the Society and failure to issue notices of subsequent hearings deprived the petitioners of a meaningful opportunity to present their case; whether the arbitrator could proceed ex parte without notice of the intention to do so; and whether an award imposing ₹18.95-crore liability was legally sustainable when the guarantee and mortgage documents were for a ₹1.50-crore facility.
A further issue was whether the award satisfied the statutory requirement of a reasoned arbitral award under Section 31(3).
Petitioner’s Arguments
The petitioners contended that Petitioner No. 1 and Respondent No. 2 had guaranteed only the original ₹1.50-crore facility. The mortgage deed likewise referred to an overdraft facility of ₹1.50 crore.
They disputed the Society’s claim that an additional ₹3 crore formed part of a ₹4.50-crore credit facility. According to them, there was no adequate loan documentation demonstrating how the original ₹1.50-crore facility became ₹4.50 crore or how the guarantors became liable for the enhanced amount.
They further argued that the arbitrator’s award contained virtually no discussion of the evidence or reasoning explaining how liability of ₹18.95 crore was arrived at.
On natural justice, they argued that although the statement of claim was received, the approximately 17 documents relied upon by the Society were not supplied. They repeatedly requested them, yet were told to collect them from the arbitrator. They also did not receive notices of subsequent hearings, minutes of arbitral meetings or the affidavit of evidence ultimately relied upon against them.
On jurisdiction, the petitioners argued that the parties resided in Mumbai, the loan was sanctioned in Mumbai, documents were executed in Mumbai and the mortgaged property was situated in Mumbai. Belgaum was merely where the arbitrator conducted sittings and had never been designated as the juridical seat.
Respondent’s Arguments
The Society argued that the petitioners themselves chose not to participate despite receiving notice and therefore could not subsequently complain about an ex parte award.
It maintained that a ₹4.50-crore cash-credit facility had been granted and that Petitioner No. 1 and Respondent No. 2 were guarantors. Since the evidence before the arbitrator remained uncontroverted, the Society submitted that the arbitrator was entitled to accept it.
Relying on Quippo Construction Equipment Pvt. Ltd. v. Janardan Nirman Pvt. Ltd., it argued that a party that receives notice but voluntarily remains absent cannot take advantage of its own failure to participate.
The Society also contested the Bombay High Court’s jurisdiction because the arbitral proceedings had taken place at Belgaum.
Analysis of the Law
The Court first addressed seat, venue and territorial jurisdiction.
It held that this was statutory arbitration under Section 84 of the MSCS Act and that the statutory scheme itself did not designate Belgaum as the seat. Merely stating in the award that the arbitrator was “Sitting at Belgaum” did not establish a juridical seat.
The Court found that the borrower and guarantors resided in Mumbai; the Society’s branch granting the loan was in Mumbai; the loan and mortgage documents were executed in Mumbai; and the mortgaged property was situated in Mumbai. No part of the cause of action arose in Belgaum.
Accordingly, under Section 2(1)(e) of the Arbitration Act, the Mumbai Court had supervisory jurisdiction.
On natural justice, the Court found serious procedural defects. The Society relied upon around 17 documents, including the alleged ₹3-crore promissory note, loan agreement, mortgage deed and guarantee. Yet those documents were not furnished with the statement of claim.
Under Section 24(3), documents and evidentiary material supplied to the tribunal by one party must be communicated to the other. Failure to do so deprived the petitioners of the full opportunity to present their case guaranteed by Section 18.
The Court further found that after the first hearing notice, no subsequent hearing notices were issued, even though the proceedings were adjourned several times. Neither the minutes nor the affidavit of evidence relied upon by the arbitrator was served upon the petitioners.
The Court therefore held that the petitioners had been denied a proper opportunity to present their case, attracting Section 34(2)(a)(iii).
Precedent Analysis
The Court relied substantially upon Ssangyong Engineering & Construction Co. Ltd. v. NHAI, particularly on Sections 18 and 24(3). It reiterated that every party must receive the documents and evidentiary material supplied to the tribunal and must have a full opportunity to present its case.
Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. was applied on the requirement of reasons under Section 31(3). The Supreme Court had explained that arbitral reasoning must be proper, intelligible and adequate; an unintelligible award may effectively amount to an award without reasons.
The Court also considered Associate Builders v. DDA and Delhi Metro Rail Corporation Ltd. v. Delhi Airport Metro Express Pvt. Ltd. on perversity, patent illegality and ignoring vital evidence.
On the distinction between seat and venue, the Court examined BGS SGS Soma JV v. NHPC Ltd. It held that the principles concerning a designated venue becoming a juridical seat did not make Belgaum the seat here because there was no express designation or conscious determination of Belgaum as the seat.
The Society’s reliance upon Quippo Construction and Jamboo Kumar Jain v. Tata Capital Financial Services Ltd. did not assist it. Those authorities involved situations where parties had received adequate notices and nevertheless remained absent.
Here, by contrast, only the first notice had been issued, subsequent notices and minutes were not served, and even the evidence relied upon against the petitioners was not supplied.
The Court also relied upon the principle discussed in Sohan Lal Gupta v. Asha Devi Gupta and Lovely Benefit Chit Fund & Finance Pvt. Ltd. v. Puran Dutt Sood that an arbitrator should notify the defaulting party of the intention to proceed ex parte before finally proceeding in its absence.
Court’s Reasoning
Two independent defects ultimately proved fatal to the award.
First, there was a complete denial of a meaningful opportunity to defend the claim. The petitioners were not supplied the documents forming the foundation of the Society’s claim; no subsequent hearing notices were given; the minutes and affidavit of evidence were not served; and there was no notice that the arbitrator intended to proceed ex parte.
The Court expressly held that an arbitrator must give notice of the intention to proceed ex parte. Here, after the first notice, the arbitrator simply proceeded in the petitioners’ absence, which the Court described as a “complete go-by to the principles of natural justice.”
Second, the award failed as a reasoned award. The arbitrator had essentially reproduced the Society witness’s affidavit and accepted the claim without analysing the documentary evidence.
Most significantly, the Court found that the guarantee executed by Petitioner No. 1 and Respondent No. 2 was limited to ₹1.50 crore, the deceased’s loan application was for ₹1.50 crore, and the mortgage deed also secured an overdraft of ₹1.50 crore. Yet the guarantors were made jointly and severally liable in relation to a ₹4.50-crore facility, ultimately producing an award exceeding ₹18.95 crore.
The Court held that ignoring this vital evidence rendered the award perverse and patently illegal.
Conclusion
The Bombay High Court held that the arbitral proceedings violated natural justice and that the award was also vitiated by lack of reasoning, perversity and patent illegality.
Accordingly, the ₹18.95-crore arbitral award dated 7 March 2022 was quashed and set aside, and the Section 34 petition was allowed. All pending interim applications were disposed of.
Case Details
Case: Manjula Dinesh Rita & Ors. v. Lokmanya Multipurpose Co-operative Society Ltd. & Anr.
Court: High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction, Commercial Division
Case Number: Commercial Arbitration Petition No. 239 of 2023
Judge: Justice Sharmila U. Deshmukh
Reserved On: 7 August 2026
Pronounced On: 16 September 2026
Neutral Citation: 2026:BHC-OS:20336
Result: Petition allowed; ₹18.95-crore arbitral award quashed and set aside.
