Arbitrator Appointed By Agreed Institution Not Per Se Unilateral: Madras High Court

Drawing a clear distinction between unilateral appointments and institutional nominations, the Madras High Court has held that an arbitrator appointed by an arbitral institution agreed upon by the parties cannot automatically be treated as a unilateral appointee, even if one side initiates the process.

“The appointment of Arbitral Tribunal by an institution that is agreed upon between the parties per se cannot be dealt with in the same manner in which the Court deals with an unilateral appointment of an Arbitrator,” Justice N. Anand Venkatesh observed while upholding an arbitral award in favour of Sundaram Finance Limited.

At the same time, the court cautioned that financial institutions cannot bypass settled law by creating so-called arbitral bodies as a ruse. Referring to developments after the Supreme Court's rulings on unilateral appointments, the judge noted that some entities have formed associations and described them as arbitral institutions in order to “get over the judgment of the Apex Court.” Courts, he said, must test the credibility and integrity of such institutions whenever objections are raised.

The court also issued what it described as a clarion call to the executive to notify the pending amendments under Section 11(3A) of the Arbitration and Conciliation Act. It recorded that although the amended provisions empower courts to designate arbitral institutions graded by the Council under Section 43-I of the Act, they have not yet been brought into force, leading to a stalemate.

If notified, the Supreme Court and High Courts would be able to designate recognised institutions, reduce applications under Section 11 of the Act and save the precious time of the courts. “Hopefully this clarion call is heard by the executive to immediately take steps to notify the relevant provisions under the Act to designate arbitral institutions,” the judge said.

The dispute arose from a loan agreement dated July 31, 2019 under which Thomas Varghese availed a vehicle loan of Rs.20,15,000 from Sundaram Finance Limited. His father signed the agreement as guarantor.

The loan was to be repaid in 42 monthly instalments. After the borrower defaulted, the vehicle was surrendered and sold for Rs 8 lakh, leaving an outstanding of Rs 16,62,289.80.

Sundaram Finance then invoked arbitration and approached the Madras Chamber of Commerce and Industries to appoint an arbitrator. Notices were issued to the borrower and the guarantor, but neither appeared. They were set ex parte, and on April 13, 2023, the arbitrator directed them to pay Rs 15,76,575.52 with 18 per cent interest from February 14, 2022, along with costs

During the pendency of the proceedings, the guarantor died on January 26, 2023. On this aspect, the court was categorical. “Whether there is knowledge or lack of knowledge, the award against a dead person is nullity in the eye of law,” it held.

The award was therefore declared a nullity insofar as it operated against the deceased guarantor. However, the court clarified that it would continue to bind the petitioner who was the principal borrower.

Rejecting the borrower's objection, the court said there is a clear difference between an arbitrator chosen directly by one of the parties and one nominated by an arbitral institution that both sides had agreed to in their contract. Had the Managing Director of the lender appointed the arbitrator, such an appointment would have been hit by Section 12(5) of the Act, and the award would have become a nullity in the eye of law, the court noted.

In the present case, however, the appointment was made by MCCI. On examining its credentials, the court recorded that MCCI was started in 1836, is affiliated to the Indian Council of Arbitration and is recognised among institutions in India by the International Council for Commercial Arbitration.

“Such appointment of an Arbitrator by the arbitral institution cannot be construed as an unilateral appointment of an Arbitrator since the institution is performing its function by appointing an Arbitrator as agreed between the parties and which to an extent is recognised under Section 11(6) of the Act,” the court held.

Finding that the arbitrator had properly appreciated the evidence and that the award did not suffer from perversity or patent illegality warranting interference, the court dismissed the petition filed under Section 34 of the Act and directed the petitioner to pay costs of Rs.25,000 to the respondent.

For Petitioner (Thomas Varghese): Advocate R. Vaishali

For Respondent (Sundaram Finance Limited): Senior Counsel Mukund for Advocate M. Arunachalam