2022/DHC/005313

IN THE HIGH COURT OF DELHI AT NEW DELHI

% Judgment delivered on: 05.12.2022

+ FAO(COMM) 60/2021 and CM Nos. 8298/2021 & 40377/2022

RAM KUMAR AND ANR. ..... Appellants

versus

SHRIRAM TRANSPORT FINANCE

CO. LTD. ..... Respondent
Advocates who appeared in this case:

For the Appellants : Appellant in person.

For the Respondent : Mr Suraj Kumar Singh, Mr Bharat Singh and
Mr Devesh Gupta, Advocates.
CORAM
HON’BLE MR JUSTICE VIBHU BAKHRU
HON’BLE MR JUSTICE AMIT MAHAJAN

JUDGMENT

VIBHU BAKHRU, J

1. The appellants have filed the present appeal under Section 37 of

the Arbitration and Conciliation Act, 1996 (hereafter ‘the A&C Act’)
impugning an order dated 30.06.2020 (hereafter ‘the impugned
order’) rendered by the learned Commercial Court. By virtue of the
impugned order, the learned Commercial Court rejected the appellants’
application preferred under Section 34 of the A&C Act [being OMP
(Comm.) No.44/2019 captioned Ram Kumar & Anr. v. Shriram
Transport Finance Co.], whereby they had impugned an arbitral award

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dated 30.08.2019 (hereafter ‘the impugned award’) delivered by an

arbitral tribunal comprising of a sole arbitrator.

2. In terms of the impugned award, the Arbitral Tribunal has

awarded a sum of Rs. 4,01,987/- (Rupees Four Lakh One Thousand and
Eighty-Seven only) with interest on the aforesaid amount at 12% p.a,
with effect from 16.08.2019 till the date of its realization, in favour of
the Shriram Transport Finance Co. Ltd. (hereafter ‘the respondent’).

3. The learned Commercial Court found no ground to set aside the

impugned award. The court rejected the contention that the learned Sole
Arbitrator was ineligible to act as an arbitrator under Section 12(5) of
the A&C Act or that the impugned award could be impeached on the
ground of justifiable doubts as to the independence and impartiality of
the learned Sole Arbitrator. Further, the learned Commercial Court held
that, as per Section 12 of the A&C Act, an arbitrator is required to give
a declaration only if he is of the view that there are circumstances which
affect his independence and impartiality.

Factual Context

4. The respondent is a limited company duly incorporated under the

Companies Act, 1956 and carrying on business of hire purchase, lease
and loan-cum-hypothecation in respect of light motor vehicle/medium
motor vehicle/heavy goods vehicle as per the guidelines laid down by
the Reserve Bank of India (RBI). The respondent (claimant before the
Arbitral Tribunal) states that appellant no.1 (Mr. Ram Kumar) had
approached the respondent, seeking finance of ₹2,95,500/- for the

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purchase of goods/passenger vehicle. It is the respondent’s case that the

appellant entered into a loan-cum-hypothecation agreement (hereafter
‘the Agreement’) on 12.03.2015, in respect of vehicle bearing RC No.
DL 1ZZ-1722, with the respondent for the total agreement value of
₹3,75,420/-, which was payable in 23 monthly installments. Mr. Ram
Kumar executed the above-mentioned transaction as borrower and
appellant no.2 (Mr. Sunil Mehta) as that of a guarantor; therefore, both
are jointly and severally liable to pay the respondent the amount due
under the Agreement.

5. The respondent claims that the appellants failed and neglected to

pay the installments and the amount outstanding and payable by
appellant no.1 swelled to a sum of ₹4,01,987/- as on 18.06.2018.

6. The respondent states that as the appellants had defaulted in

payment of the monthly installments and failed to respond to the
demand for clearing the dues, hence, it seized the vehicle in question.

7. The respondent sold the seized vehicle for a sum of ₹ 1,20,000/-.

According to the respondent, that was the highest market price available
for the vehicle.

8. According to the appellants, the seized vehicle was sold in a non-

transparent manner at a price much below its assessed value. The
appellants are also aggrieved by the respondent demanding further sums
from them.

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9. The respondent invoked the arbitration clause under the

Agreement and appointed the learned Sole Arbitrator. The arbitral
proceedings culminated in the impugned award.

10. Aggrieved by the impugned award, the appellants filed the

petition for setting aside the impugned award. The said petition was
rejected by the impugned order.

Reasons and Conclusion

11. The principal controversy that needs to be addressed is whether

the impugned award is vitiated on the ground that the learned Sole
Arbitrator had failed to make the necessary disclosure as required under
Section 12(1) of the A&C Act; and, whether he was ineligible to be
appointed as an arbitrator.

12. Indisputably, the learned Sole Arbitrator was appointed by the

respondent without consultation or concurrence of the appellants. The
learned counsel appearing for the respondent states that the arbitration
agreement was invoked by the appellants and that the appellants had
called upon the respondent to appoint an arbitrator. However, he does
not dispute that the learned Sole Arbitrator had been appointed
unilaterally by the respondent and without seeking any concurrence
from the appellants. It is also not disputed that the learned Sole
Arbitrator had not made any disclosure as required under Section 12(1)
of the A&C Act.

13. The appellants had assailed the impugned award, inter alia, on
the ground that the learned Sole Arbitrator had been appointed without

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the knowledge of the appellants. The appellants also alleged that the
learned Sole Arbitrator was biased in favour of the respondent as he had
been appointed as an arbitrator by the respondent in several such matters
against various parties. The appellants allege that the learned Sole
Arbitrator is on the panel of the respondent and acts as its agent.

14. The learned Commercial Court had rejected the contention that
the impugned award is liable to be set aside on account that the learned
Sole Arbitrator was ineligible to be appointed as an arbitrator by virtue
of Section 12(5) of the A&C Act. The relevant extract of the impugned
order indicating the reasons for rejecting the appellants’ challenge on
the aforesaid ground is set out below:

“23. As regards challenge to appointment of the arbitrator,

no formal application was moved challenging the
appointment of the arbitrator and contention that the
arbitrator was panel arbitrator and hence was biased, the
petitioner was required to challenge the arbitrator by
moving appropriate application while he has chosen not
to do so for reasons best known to him.

24. However, we may go little further to S. 12 of the Act,

1996 whereby arbitrator is required to disclose in writing
circumstances which indicates either direct or indirect, of
any past or present relationship with or interest in any of
the parties or in relation to the subject matter in dispute,
whether financial, business, professional or other kind,
which is likely to give rise to justifiable doubts as to his
independence or impartiality. The guidance to the
circumstance which exist and gives rise to the justifiable
doubts as to the independence or impartiality of an
arbitrate is given in Fifth Schedule which amongst other
is also provided for number of cases within past three
years for which he has been appointed as arbitrator by one

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of the parties or an affiliate of one of the parties. The

disclosure of such facts are to be made in the form
prescribed in Sixth Schedule, which appears to be not
mandatory and it is necessary only when arbitrator feels
that there is justifiable doubt as to his independence and
impartiality to give disclosure or party may also seek
disclosure. However, S. 12 (5) of the Act, 1996 makes the
declaration mandatory if the grounds falls as provided in
Seventh Schedule which will per se make appointment of
arbitrator illegal which however does not provide for
number of arbitration done by the arbitrator for a
particular party within period of three years. Therefore,
arbitrator is required to give declaration if he finds the
disclosure is necessary which affects his independence
and impartiality and yet he can continue with the
arbitration if the parties does not object.
25. In the present case neither petitioner has provided the
number of arbitration done by the learned arbitrator for
Sri Ram Transport Finance Co. Ltd in past three years nor
moved any application before learned arbitrator seeking
such declaration and therefore a bald plea that arbitrator
is on panel of respondent/ claimant company cannot be
accepted to make appointment of learned arbitrator
illegal. The contention is accordingly rejected.”
15. It is apparent from the above that the learned Commercial Court
proceeded on the basis that it was necessary for the appellants to file an
application to challenge the appointment of an arbitrator. The learned
Commercial Court accepted that the arbitrator was required to disclose
the circumstances which may give rise to justifiable doubts as to his
independence and impartiality. However, it was found that the
impugned award could not be assailed for want of such disclosure. The
learned Commercial Court was of the view that the disclosure, required
in the form prescribed in the Sixth Schedule of the A&C Act, was not

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mandatory; the learned Sole Arbitrator was required to make a

disclosure only when he felt that there were justifiable doubts to his
independence and impartiality. The learned Commercial Court also
held that acting as an arbitrator, in other disputes involving the
respondent, was not a circumstance which is covered under the Seventh
Schedule of the A&C Act and therefore, the learned Sole Arbitrator was
not ineligible to act as such in the present arbitral proceedings.

16. We are of the view that the learned Commercial Court has fallen
into error in concluding as aforesaid. By an order dated 13.09.2022, this
court had directed the respondent to file an affidavit, clearly disclosing
whether the learned Sole Arbitrator, who had been appointed by the
respondent, was also involved in any other matter or was engaged in
any professional capacity by the respondent or any of its affiliates. The
respondent was also directed to disclose the details of such
appointment. The said directions were not strictly complied with. The
respondent has filed an affidavit merely stating that “the learned
arbitrator has been appointed in numerous cases and conducted
arbitrations with utmost diligence and honesty”. The respondent has
not provided any details of any such appointments. The respondent has
also not disclosed whether the learned Sole Arbitrator has been engaged
in any capacity other than that of an arbitrator.

17. The learned counsel appearing for the respondent submits that
the exact details of the number of arbitrations conducted by the learned
Sole Arbitrator in the recent past cannot be ascertained since no record
of the same has been maintained. He states that although the respondent

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cannot readily specify the number of matters in which the learned Sole
Arbitrator had been appointed by the respondent, however, it is a large
number.

18. This court finds it difficult to accept that the respondent does not
have the necessary records to ascertain the number of matters (and their
details) in which the learned Sole Arbitrator has been appointed by the
respondent. However, it is clear that he has been appointed by the
respondent as an arbitrator in numerous matters.

19. In terms of Explanation 1 to Section 12(1) of the A&C Act – the

grounds as stated in the Fifth Schedule of the A&C Act – the learned
Sole Arbitrator was required to be guided by the grounds as stated in
the Fifth Schedule of the A&C Act. Entry 22 of the Fifth Schedule of
the A&C Act specifically provides circumstances where an arbitrator
has, within the past three years, been appointed as an arbitrator on more
than two occasions by either of the parties or their affiliates. This Court
is unable to accept that such a disclosure is not mandatory and is merely
at the discretion of the arbitrator. The onus for disclosing the number of
matters in which the learned Sole Arbitrator had been appointed as such,
at the instance of the respondent, rested with the learned Sole Arbitrator.
The assumption that the burden to ascertain the circumstances that may
give rise to justifiable doubts as to the independence and impartiality of
the arbitrators is on the parties, is erroneous; this disclosure is
necessarily required to be made by the person approached in connection
with his appointment as an arbitrator.

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20. In terms of Explanation 2 to Section 12(1) of the A&C Act, the

arbitrator is also required to make the necessary disclosure as specified
in the Sixth Schedule of the A&C Act.

21. The learned Commercial Court found that the appellants were
precluded from assailing the impugned award on the ground that they
had not filed an application before the learned Sole Arbitrator to make
the disclosure or challenge his appointment.

22. It is necessary to note that the language of Section 12(1) of the

A&C Act does not leave it at the discretion of any person, approached
in connection with being appointed as an arbitrator, to make the
necessary disclosures. The use of the words “he shall disclose” in
Section 12(1) of the A&C Act makes it mandatory for the person who
is approached in connection with his possible appointment as an
arbitrator, to make a disclosure of all circumstances that may give rise
to justifiable doubts as to his independence and impartiality.

23. In terms of Explanation 2 to Section 12(1) of the A&C Act, such

disclosure is to be made in the form specified in the Sixth Schedule of
the A&C Act. It may be sufficient compliance of the Explanation if the
necessary particulars, as required to be disclosed in the Sixth Schedule,
are disclosed but the disclosure is not in the format as provided.
However, it would be erroneous to assume that the requirement of
making a disclosure is not mandatory.

24. This Court is of the view that the requirement of making a

disclosure is a necessary safeguard for ensuring the integrity and

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efficacy of an arbitration as an alternate dispute resolution mechanism

and is not optional.

25. Insofar as the ineligibility of the learned Sole Arbitrator to act as

such is concerned, it is relevant to refer to a few authorities.

26. In TRF Ltd. v. Energo Engineering Projects Ltd.: (2017) 8 SCC

377, the Supreme Court had referred to Section 12(5) of the A&C Act
and noted that the Managing Director of a concerned party would be
ineligible to act as an arbitrator. The Court had further held that being
ineligible to act as an arbitrator, he was also ineligible to appoint an
arbitrator. In Perkins Eastman Architects DPC & Anr. v. HSCC
(India) Ltd.: (2020) 20 SCC 760, the Supreme Court, following the
earlier decision in TRF Ltd. v. Energo Engineering Projects Ltd.
(supra), held that the Chairman-cum-Managing Director of a party was
ineligible to appoint an arbitrator.

27. It is important to note that the decisions of the Supreme Court in

TRF Ltd. v. Energo Engineering Projects Ltd. (supra) and Perkins
Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (supra) were
rendered in the context of Section 12(5) of the A&C Act. The said
Section reads as under:

“12(5). Notwithstanding any prior agreement to the

contrary, any person whose relationship, with the parties
or counsel or the subject-matter of the dispute, falls under
any of the categories specified in the Seventh Schedule
shall be ineligible to be appointed as an arbitrator:

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Provided that parties may, subsequent to disputes having

arisen between them, waive the applicability of this sub-
section by an express agreement in writing.”

28. Clearly, an award rendered by a person who is ineligible to act as

an arbitrator would be of little value; it cannot be considered as an
arbitral award under the A&C Act. While it is permissible for the parties
to agree to waive the ineligibility of an arbitrator, the proviso to Section
12(5) of the A&C Act makes it clear that such an agreement requires to
be in writing. In Proddatur Cable TV Digi Services v. Siti Cable
Network Limited: (2020) 267 DLT 51, the learned Single Judge of this
Court, following the decision in TRF Ltd. v. Energo Engineering
Projects Ltd. (supra) and Perkins Eastman Architects DPC & Anr. v.
HSCC (India) Ltd. (supra), held that unilateral appointment of an
arbitrator by a party is impermissible.

29. In Bharat Broadband Network Limited v. United Telecoms

Limited: (2019) 5 SCC 755, the Supreme Court rejected the contention
that the waiver of a right to object the ineligibility of an arbitrator, under
Section 12(5) of the A&C Act, could be inferred by conduct. The
relevant observations made by the Supreme Court are set out below:

“20. This then brings us to the applicability of the proviso

to Section 12(5) on the facts of this case. Unlike Section
4 of the Act which deals with deemed waiver of the right
to object by conduct, the proviso to Section 12(5) will
only apply if subsequent to disputes having arisen
between the parties, the parties waive the applicability of
sub-section (5) of Section 12 by an express agreement in
writing. For this reason, the argument based on the

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analogy of Section 7 of the Act must also be rejected.

Section 7 deals with arbitration agreements that must be
in writing, and then explains that such agreements may be
contained in documents which provide a record of such
agreements. On the other hand, Section 12(5) refers to an
“express agreement in writing”. The expression “express
agreement in writing” refers to an agreement made in
words as opposed to an agreement which is to be inferred
by conduct. Here, Section 9 of the Contract Act, 1872
becomes important. It states:

“9. Promises, express and implied. – Insofar as

the proposal or acceptance of any promise is
made in words, the promise is said to be express.
Insofar as such proposal or acceptance is made
otherwise than in words, the promise is said to
be implied. ”

It is thus necessary that there be an “express” agreement

in writing. This agreement must be an agreement by
which both parties, with full knowledge of the fact that
Shri Khan is ineligible to be appointed as an arbitrator,
still go ahead and say that they have full faith and
confidence in him to continue as such.”

30. In the present case, the learned Commercial Court had proceeded
on the basis that the appellants are precluded from raising an objection
as to the ineligibility of the arbitrator as no such application was made
by the appellants before the Arbitral Tribunal. The learned Commercial
Court has also faulted the appellants by not providing the full particulars
as to the number of arbitrations conducted by the learned Sole Arbitrator
for the respondent company in the past three years. In addition, the
appellants have been faulted by the learned Commercial Court in not

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filing an application before the learned Sole Arbitrator, seeking a

declaration as required under Section 12(5) of the A&C Act.

31. This Court is of the view that the approach of the learned
Commercial Court is flawed. Unilateral appointment of the Arbitrator
by the respondent is impermissible. The fact that the learned Sole
Arbitrator had been engaged in a number of matters by the respondent
is, concededly, a material fact that would raise justifiable grounds as to
his independence and impartiality. Thus, in addition to being ineligible
as an arbitrator under Section 12(5) of the A&C Act, the grounds giving
rise to justifiable doubts as to the independence and impartiality exist in
the present case. The learned Sole Arbitrator was required to disclose
in writing such circumstances which are likely to give rise to justifiable
doubts as to his independence and impartiality, but he had failed to
make any such disclosure. In our view, since the grounds giving rise to
justifiable doubts as to impartiality exist, failure to make such
disclosure vitiates the arbitral proceedings and the impugned award.

32. In view of the above, the appeal is allowed. The impugned order
as well as the impugned award are set aside. All pending applications
are also disposed of. The parties are left to bear their own costs.

VIBHU BAKHRU, J

AMIT MAHAJAN, J
DECEMBER 05, 2022
RK

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