Awards passed by Unilaterally Appointed Arbitrators Not Executable: HC DB upholds Commercial Court’s Decision

The Division Bench of the High Court of Delhi, presided by Justices Vibhu Bakhru and Amit Mahajan, has dismissed an Appeal filed by a Bank and upheld the decision of the District Judge, Commercial Court wherein the learned judge had refused to execute an Award passed by the unilaterally appointed Sole Arbitrator.

To send out a strong message to all the Banks and NBFCs which are indulging in this illegal practice of unilateral appointment of Sole Arbitrators, District Judge Surinder S. Rathi had also imposed a cost of ₹25,000 on the Bank.

While deciding the appeal titled Kotak Mahindra Bank Ltd. v. Narendra Kumar Prajapat (2023 Latest Caselaw 709 Del), the Commercial Appellate Division of the High Court observed, “The Learned Commercial Court has held that an award rendered by a person who is ineligible to act as an Arbitrator by virtue of the provisions of Section 12(5) of the A&C Act is a nullity and, therefore, cannot be enforced. It has accordingly dismissed the enforcement petition under Section 36 of the A&C Act with the cost quantified as ₹25,000/-.”

In a sternly worded 46-page judgement (attached at the end of this article), the Commercial Court not only discussed the relevant provisions of the Arbitration and Conciliation Act, 1996 along with the Supreme Court and High Court Judgements at length but also propounded the balanced approach in the appointment of sole arbitrators as prescribed by the UNCITRAL Model Law on Commercial Arbitration, 1985 alongside legal position in other countries.

While dismissing the execution petition, Judge SS Rathi relied on Section 12(5) read with Schedule 7 of the A&C Act duly explained by the Supreme Court in TRF Ltd. v. Energo Engineering Projects Ltd. (2017) and Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (2020), Bharat Broadband Network Limited v. United Telecoms Limited (2019) and several judgments of the Delhi High Court, to reach the conclusion that the unilateral appointment of Sole Arbitrator is void ab initio, non-est, and a nullity.

Lamenting the malpractice, the Court of District Judge Commercial stated that, “It is strange that the NBFCs like the award holder in the case in hand continue to do a shut-eye to the above legal provision and the binding dicta of the Supreme Court which as per Article 141 of the Constitution of India is Law of the Land and continue to appoint Sole Arbitrators unilaterally.”

Noting that the arbitration proceedings carried out by unilaterally appointed Ad-hoc Arbitrators are totally working in a one-side manner, the learned Judge said that such proceedings are weakening people’s faith in Arbitration as an ADR by not adhering to “either the celebrated Principles of Natural Justice of being neutral and unbiased or sticking to Judicial Ethics as applicable to them in so far as they are performing an adjudicatory function under Law promulgated by Parliament of India. More so when Awards passed by them have the strength of a decree of a Civil Court.”

Calling a spade, a spade, Judge Rathi stated, “‘Unilateral Appointment of Arbitrators’ by the NBFCs is nothing but a blatant violation and disregard of Law laid by Full Bench of Hon’ble Supreme Court and is akin to Contempt of Court. Filing a petition seeking execution of such Ex-Parte Awards obtained through such Unilateral Appointments is nothing but a classic example of abuse of the process of Courts by Award Holders to extract money out of the hapless respondents who more often than do not have any clue about the very initiation, holding of proceeding and passing of such like Ex-Parte Arbitral Awards before the chosen Sole Arbitrators in an assembly line like fashion.”

While deciding the appeal against the dismissal of the execution petition, the Delhi High Court said “This Court finds no infirmity with the aforesaid view (of District Judge, Commercial Court). A person who is ineligible to act an Arbitrator, lacks the inherent jurisdiction to render an Arbitral Award under the A&C Act. It is trite law that a decision, by any authority, which lacks inherent jurisdiction to make such a decision, cannot be considered as valid. Thus, clearly, such an impugned award cannot be enforced.” The High Court upheld the imposition of the cost also, which the penalised bank tried to object to.

Moreover, the High Court pulled the Kotak Mahindra Bank for an unexplained delay of 68 days in filing the appeal. Accordingly, the High Court dismissed the appeal both on the grounds of delay as well as on merits.

The decision of Judge Surinder S. Rathi is of great significance as it marks a new development in the arbitration law whereby the execution of the award has been refused by the Execution Court suo-moto, without filing an objection petition by the JD before the court. The Judge invoked Section 47 of the Civil Procedure Code which empowers the Court to refuse execution if it is found that the Court/ Tribunal which passed the decree/award had no power to pass such decree/award.

The decision of the Commercial Appellate Division of the High Court, upholding the decision of the District Judge Commercial Court will usher a new era of transparency and adherence to the Principles of Natural Justice in the Arbitral regime in India, thereby reinforcing the faith of the masses in arbitration as a reliable ADR mechanism.

District Judge SS Rathi decided the matter after discussing it under the following heads:

Read the Judgements passed by the Delhi High Court and the Commercial Court:

Download Judgment of Division Bench of High Court

Download Judgment of District Judge, Commercial Court

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