Named Arbitrator In Notice U/S 21 Of A&C Act Can't Pass Orders Without Consent Of Other Party Or Order Of Appointment U/S 11: Karnataka High Court
The Karnataka High Court bench of Justice Suraj Govindaraj has held that a person who is the named Arbitrator in a notice issued under Section 21 of the Arbitration and Conciliation Act, 1996, cannot enter reference and pass orders without the other person consenting thereto or without an order of appointment of Arbitrator by institution or a Court under Section 11 of...
The Karnataka High Court bench of Justice Suraj Govindaraj has held that a person who is the named Arbitrator in a notice issued under Section 21 of the Arbitration and Conciliation Act, 1996, cannot enter reference and pass orders without the other person consenting thereto or without an order of appointment of Arbitrator by institution or a Court under Section 11 of the Act.
Brief Facts
The Petitioners filed the writ petition seeking to quash the proceedings pending before Respondent No. 2-Arbitrator. Petitioner No.1 is the widow and Petitioner No.2 is the son of Manjunath, who passed away on 25.08.2018. Manjunath had taken two vehicle loans from Shriram Transport Finance Company Limited (Respondent No. 1). After Manjunath's death, Shriram issued two legal notices on 27.07.2019 to the Petitioners, demanding repayment of Rs. 28,33,882 and Rs. 28,61,998 for the vehicles. It was stipulated in these notices that if the payments were not made, Shriram would appoint an arbitrator. Shriram appointed an Arbitrator, who passed an order under Section 17, directing the repossession of the hypothecated vehicles.
Submissions:
Counsel for the Petitioners submitted that no notice was ever issued to Sri Manjunath during his lifetime. It was only after his demise that a notice dated 27.07.2019 was sent. It was submitted that even before issuing the said notices, Shriram had already approached the Arbitrator on 12.07.2019 with applications under Section 17 of the Arbitration and Conciliation Act, 1996, seeking ad interim relief to seize the vehicles. The Arbitrator, on the same date, passed an order permitting repossession on the presumption that the Respondents were attempting to alienate or cause damage to the vehicles.
The counsel contended that the Arbitrator could not have entered reference or passed orders on 12.07.2019, as his nomination itself was only communicated in the notice dated 27.07.2019. It was argued that Shriram had no authority to unilaterally appoint an Arbitrator since the arbitration agreement between the parties did not specify a named Arbitrator. It was further submitted that the Petitioners, being merely legal heirs of the deceased borrower and not signatories to any arbitration agreement with Shriram, could not be proceeded against.
Counsel for the Respondent submitted that the appointment of the Arbitrator was in accordance with the arbitration clause. He relied on the Supreme Court's decision in R.S. Madireddy & Anr. v. Union of India & Ors to submit that Shriram, being a private body, does not discharge any public function and thus cannot be subjected to writ jurisdiction under Article 226.
Observations
The Court noted that neither party placed the arbitration agreement on record. When there was no agreement available on record to indicate the existence or otherwise of an arbitration clause, the question of Shriram relying upon arbitration clause would not arise. Even assuming the arbitration agreement existed, the Court noted that the said clause did not indicate a named Arbitrator. Shriram had issued a notice dated 27-07-2019 nominating Respondent No. 2 as arbitrator. The Court found that there was no consent which was expressed by the Petitioners to the appointment of Respondent No. 2 as the sole Arbitrator. It held that the appointment of the 2nd Respondent as an Arbitrator by Shriram was unilateral and thus not permissible, and the orders passed by the arbitrator were non est.
The Arbitrator had entered reference and passed orders on the interlocutory application under Section 17 on 12-07-2019, which was prior to the issuance of any notice nominating him as arbitrator on 27-07-2019. In this regard, the Court held that “a person who is the named Arbitrator in a notice issued under Section 21 of the Arbitration and Conciliation Act, 1996 cannot enter reference and pass orders without the other person consenting thereto, or without an order of appointment of Arbitrator by institution or a Court under Section 11”.
The Court held that the arbitrator misused his position by acting on behalf of and for Shriram in directing the seizure of the vehicle with the help of police. The Court condemned the conduct of the arbitrator. It observed:
“An Arbitrator is not a stooge for any party, nor is he a rubber stamp for any party. In the present case, from perusal of the record, it is clearly and categorically seen, that the 2nd Respondent has acted as a stooge and rubber stamp of Shriram and has been more loyal than the king even before he was nominated by Shriram.”
The court directed the Director General of Police, Karnataka, to appoint a suitable officer to conduct an enquiry.
The Respondent had raised a preliminary objection as to the maintainability of the Writ Petition, arguing that Shriram being a private entity, a writ under Article 226 would not lie. The Court rejected this contention in light of the egregious misuse of arbitral mechanisms. It observed that if a Constitutional Court does not come to the rescue of the Petitioners, that would amount to denial of justice to the Petitioners. Thus, the Court held that the Writ Petition was maintainable.
Case Title: Smt. Manjula & Anr. vs. Shriram Transport Finance Co Ltd & Ors.
Case No.: WP No. 10493 of 2020
Citation: 2025 LiveLaw (Kar) 199
Date of Judgment: 27.05.2025