2022 (8) TMI 1515 - HC - Indian Laws

Unilateral Appointment of Sole Arbitrator - Termination of Arbitrator s Mandate u/s 14(1)(a) - Appointment of Substitute Arbitrator - Allegations of Forged and Fabricated Loan Agreement - Validity of the arbitration agreement - Petitioner no. 1 is a Hindu Undivided Family ( HUF ) - Respondent is a Non-Banking Financial Company ( NBFC ) - HELD THAT - The dicta laid down in Perkins Eastman 2019 (11) TMI 1154 - SUPREME COURT judgments makes it crystal clear that there cannot be unilateral appointment of a sole arbitrator by the respondent as per Clause 19 of the loan agreement as the same is illegal and defeats the very purpose of unbiased and impartial adjudication of the dispute between the parties. The guiding principle is transparency fairness neutrality and independence in the selection process and hence appointment of a sole arbitrator can either be with mutual consent of parties or by an order of the competent court. There can be no third way. In the present case the facts clearly indicate that the petitioners not only did not deny receiving the said sum of money from the respondent company but also could not produce any other document or agreement under which they had received the said sum of money. In my opinion the aforesaid contention by the petitioners of forged and fabricated agreement is merely a dilatory tactic as it is manifestly evident from the facts in hand that they have failed to provide any evidence in favour of their claim of fabrication and forgery in reference to the authenticity of the loan agreement. The petitioners could have presented strong cogent evidence such as bank account statements income tax returns etc. to refute that they have received the said sum of money from the respondent and to prima facie establish a case of non-existence of a valid arbitration agreement. But that ship has long sailed. Additionally I must add it is preposterous for the petitioners to rely on the same arbitration clause in the loan agreement to contend that the present arbitrator cannot de jure perform his functions and seek his termination u/s 14 of the Act and at the same time claim that both the arbitration clause and the loan agreement do not exist at all especially since the factum of receipt of the loan amount is not in dispute. The petitioner can always take recourse to section 16 of the Arbitration and Conciliation Act 1996 which empowers the arbitral tribunal to rule on its own jurisdiction and provides an opportunity to the parties to approach the tribunal with objections in respect to the existence and validity of the arbitration agreement. Thus the mandate of the present arbitrator is terminated and the arbitrator is discharged from his duty. Furthermore in terms of Section 14 of the Act. A.P. is accordingly disposed of.

Summary

Issues Involved:
1. Termination of the mandate of the Learned Arbitrator u/s 14(1)(a) of the Arbitration and Conciliation Act, 1996.
2. Validity of the unilateral appointment of the sole arbitrator.
3. Appointment of a substitute arbitrator.
4. Allegations of fraud and forgery regarding the loan agreement.

Summary:

Termination of the Mandate of the Learned Arbitrator u/s 14(1)(a):
The petitioners sought an order for termination of the mandate of the Learned Arbitrator u/s 14(1)(a) of the Arbitration and Conciliation Act, 1996. Section 14(1)(a) states that the mandate of an arbitrator shall terminate if he becomes de jure or de facto unable to perform his functions or fails to act without undue delay.

Validity of the Unilateral Appointment of the Sole Arbitrator:
The petitioners argued that the sole arbitrator was unilaterally appointed by the respondent, rendering the appointment de jure unable to perform his functions u/s 14(1)(a). They relied on TRF Limited -v- Energo Engineering Projects Ltd. and Perkins Eastman Architects DPC & Anr. -v- HSCC (India) Ltd., which held that unilateral appointment of a sole arbitrator is impermissible. The respondent countered that the appointment was not invalid u/s 12(5) read with Schedule VII of the Act.

Appointment of a Substitute Arbitrator:
The petitioners contended that the entire arbitration clause should be considered invalid, thus preventing the court from appointing a substitute arbitrator. However, the court held that only the specific portion of the arbitration clause allowing unilateral appointment was invalid. The remaining portion of the clause indicated the parties' intention to arbitrate, allowing the court to appoint a substitute arbitrator u/s 14(1). The court appointed Justice Jyotirmay Bhattacharya as the sole arbitrator.

Allegations of Fraud and Forgery:
The petitioners claimed the loan agreement was forged and fabricated. They argued that serious allegations of fraud should be decided by a civil court. The court, referencing Vidya Droalia -v- Durga Trading Corporation and A. Ayyasamy -v- A. Paramasivam & Ors., held that mere allegations of fraud are insufficient to avoid arbitration. The petitioners failed to provide evidence supporting their claims of forgery and fabrication. The court noted the inconsistency in the petitioners' reliance on the arbitration clause to challenge the arbitrator's mandate while simultaneously denying the existence of the agreement.

Conclusion:
The court terminated the mandate of the current arbitrator and appointed Justice Jyotirmay Bhattacharya as the substitute arbitrator. The court emphasized the importance of transparency, fairness, neutrality, and independence in the arbitration process. The petitioners' allegations of fraud were deemed insufficient to prevent arbitration, and the court directed the arbitral tribunal to rule on its own jurisdiction u/s 16 of the Act. The application was disposed of with no order as to costs.