The Loot (India) Pvt. Ltd. vs Reliance Capital Ltd.

R.S. Dalvi, J.—The petitioners in the above petitions (petitioner) took three loans from the respondent under separate loan agreements. The execution of the loan agreements are not denied. The petitioner failed to repay the loan amount. The failure to repay is also not denied. The petitioner executed a mortgage deed of certain properties which is also not denied. The mortgage has been registered with the Registrar of Companies (ROC), which aspect is relied upon by the petitioner itself and which shall be considered presently. There are certain other documents being a deed of guarantee, power of attorney, undertaking etc., which are also executed as in similar contracts of grant of loan. The respondent invoked arbitration as per the agreement between the parties under the arbitration clause in the loan agreement.

Clause 17 of the mortgage loan agreement required a single Arbitrator to be appointed by the Lender (respondent herein). The petitioner has signed the aforesaid documents including the very agreement containing the arbitration clause No. 17.

Upon the defaults of the petitioner the Lender invoked arbitration. The invocation is under the letter of the Lender''s Advocate addressed to the Arbitrator who is a retired Additional Chief Metropolitan Magistrate, Mumbai dated 9th April, 2012. The Advocate of the Lender forwarded the statement of claim and the compilation of documents relied upon by the Lender to the Arbitrator.

The learned Arbitrator has accepted the arbitration and consented to act as the sole Arbitrator specifying his fees and the remuneration of Arbitrator by his letter dated 10th April, 2012. Further by his letter dated 11th April, 2012 to the Lender as also the principal borrower and the guarantor under the loan agreement, being the parties to the arbitration, the Arbitrator sent copies of the statement of claim and the compilation of documents sent by the Lender''s Advocates to the principal borrower and the guarantor. The learned Arbitrator called upon them to file their statement of defence along with the documents and fixed the date and venue of hearing. He specified that the proceedings would be conducted observing fundamental principles of natural justice, on the basis of documents produced by the parties and oral arguments and oral hearings. He specified the deposit of fees of arbitration also payable by both the parties equally.

There are three loans and consequently three arbitrations between the parties. In Petition No. 1179/2012 the Arbitrator has been similarly called upon to be the Arbitrator under a letter dated 4th April, 2012, a photocopy of which has been produced in a separate compilation tendered by the petitioner. In that petition the letter of acceptance of invocation of arbitration and the appointment of a sole Arbitrator has been shown to be written by the Arbitrator on 31st January, 2012, 4 days prior to the invocation of the arbitration. This is followed by another letter dated 2nd April, 2012 of the Arbitrator written to all the parties setting out the procedure of arbitration as stated above. The respondent has stated that there appears to be a typographical error in the date of the letter dated 4th April, 2012.

The learned Arbitrator has fixed the arbitration on 11th May, 2012. The petitioner herein being the principal debtor as also the guarantors failed to appear for arbitration. The Arbitrator addressed a notice on 11th May, 2012 itself to each of them that they did not remain present on the date fixed for arbitration and that he was giving one more opportunity to them to appear before him in the interest of justice and fixed further hearing on 13th June, 2012 at 11.30 a.m. with a further notice that if they failed to be present on that date and time and if they failed to file their defence statement, the matter would be proceeded ex-parte against them.

The learned Arbitrator had, therefore, given time of one month to file the statement of defence and to appear before him.

On 2nd May, 2012 (which was after about a month in one of the petitions and a week prior to the first date of hearing itself in other petition) the petitioner''s Advocate addressed a letter to the Arbitrator challenging his appointment. It was contended that the Lender as also several other known banking financial companies, appointed judicial officers of their choice and entrusted them arbitration proceedings which practice is not healthy and depreciable. It questioned how the Arbitrator could be fair and impartial and alleged bias. The petitioner''s Advocate called upon the learned Arbitrator to provide information with regard to:

(a) His registration with the Bar Council of Maharashtra.

(b) His connection as also his family''s connection with the Lender''s Company.

(c) Whether he or his family held shares in the Lender Company.

(d) Whether he appeared on behalf of the Lender Company or filed his VP.

(e) Whether he or his family members had taken loan from the Lender Company.

(f) The number of arbitrations of the Lender Company attended and the number of petitions disposed off and pending arbitrations of other financial companies handled by him as an Arbitrator.

(g) Whether he and his family members had financial dealings with the Lender.

(h) Whether he was paid professional fee in cash or cheque.

(i) The number and details of arbitration proceedings that he conducted and the circumstances under which his name was recommended by Lender as Arbitrator.

The learned Arbitrator was not bound and liable to answer the above queries except of course his beneficial interest, if any, by holding any share or having the position of employment or he or his family having availed of any loan from the Lender.

Nevertheless the learned Arbitrator has given particulars of his enrollment as an Advocate, his retirement and his practice, the fact that he or his family members had not taken any loan or held any shares in the Lender and the fact that he had never appeared as an advocate or Arbitrator previously in any proceedings against the Lender etc.

He specified that he acted as a sole Arbitrator appointed by the Company in various disputes. He did not give particulars of the various arbitration proceedings conducted by him as sought by the petitioner''s Advocate. He clarified that his arbitration fee has been charged and paid by both the parties equally by cheque. He also stated that he was appointed as Arbitrator by some banks, financial institutions, private companies etc., but the particulars of these arbitrations could not be furnished. He stated that he could not give the reason why the Lender recommended his appointment.

The petitioner''s Advocate wrote to the Lender''s Advocates that the petitioner opposed the appointment of Arbitrator and called upon him not to resort to the arbitration which was stated to be an unethical practice which they resorted to by appointment of the persons of their choice.

The learned Arbitrator proceeded on the next date of hearing and passed his awards on 15th June 2012. These awards have been challenged in the above petitions u/s 34 of Arbitration and Conciliation Act, 1996. The awards are Ex-parte because the petitioners refused to attend before the learned Arbitrator. The awards are after supplying the statement of claim and the copies of documents and after giving a further opportunity on the first date of hearing.

The awards set out the facts including the disbursement of loan, the execution of various documents and the defaults committed by the petitioner resulting in specified balance aggregate amounts outstanding and payable to the Lender. The learned Arbitrator set out and considered the letter sent by the petitioner''s Advocates to the Arbitrator and his reply. He further set out the fact that on the first date of hearing the statement of defence was not filed and further time was granted which was not availed and hence the matter was decided ex-parte against the petitioner herein. He also set out the further letter of the petitioner''s Advocates alleging bias of the Arbitrator and taking exception to his appointment. The learned Arbitrator has considered that the petitioner herein (the respondent in the arbitration) specifically informed him that it will not attend the proceedings. He has specified which queries sought could not be furnished with reasons. He heard the Advocate of the Lender, considered the facts of the case as also several judgments with regard to the allegations of bias. He considered the documents relied upon by the claimants bearing the signatures of the petitioners and the specific sanctioned amount of loan granted and the amounts payable. He passed the award for the balance amount payable with interest at the agreed rate. He declared that the properties of the petitioner were validly and equitably mortgaged to the Lender and granted 3 months for the payment of the balance amount and failing which he directed attachment and sale of the mortgaged properties. He also restrained the petitioner herein from creating third party interest in the mortgaged property.

The award is essentially challenged on the ground of bias. The bias is the judgment of the petitioner. The bias is claimed despite answering various of the queries of the petitioner company and the guarantors. The petitioner refused to appear before the learned Arbitrator upon such premise. The petitioner notified the learned Arbitrator that it and the guarantors would not appear.

The learned Arbitrator was appointed in terms of the agreement between the parties by the Lender. He was not to be appointed by the petitioner. The petitioner had agreed to such appointment pursuant to signing the documents. The petitioner has not given a chance or the opportunity to the learned Arbitrator to prove himself. The petitioner has not shown the merits of its case which could be considered by the learned Arbitrator. The bias alleged by the petitioner is impossible to see.

The claim of the petitioner is that the appointment per se shows bias because a number of arbitrations are referred to the same Arbitrator by the Lender and other bankers and financial institutions. The petitioner has deprecated the practice and has sought to challenge it.

It may be mentioned that the parties are governed by their own agreement of arbitration. The petitioner''s Counsel questioned the Court as to whether the petitioner had an option. The answer would be in the affirmative. The petitioner had the option not to take the loan if the terms of the contract were prejudicial to the petitioner. The petitioner sought the loan. The petitioner got the loan. The petitioner defaulted in the payment of the loan. The petitioner was bound to pay the EMIs. If the petitioner had honoured its contract which was admittedly entered into there would have been no cause for the Lender to invoke arbitration. The Arbitrator required in such a matter must have a specific expertise in the business in lending monies. There would be a number of loan agreements signed by defaulters. Consequently they would require the Arbitrator who would know the essence of the loan for the determination of the claim.

Such arbitrations are much like the agreements entered into by the Union of India, State Government, Government companies, legal bodies etc., who enter into a large number of similar contracts and agreements. They would require specified Arbitrators who would know the essentials of the contracts and would require expertise in the matters relating thereto. Consequently in such contracts arbitration clause invariably provide for Arbitrators with such knowledge. They would also be the government employees, or employees of companies and legal bodies. They invariably are the Chief Engineers of such corporation and bodies. Their appointments as Arbitrators are upheld.

Judicial notice must be taken of the fact that this Court itself has a vast number of such arbitrations coming up for challenge upon awards being passed, but not as to the appointment of the Arbitrator itself. The bias of the Arbitrator cannot be perceived upon his qualification, experience, status or position. Only the award would demonstrate and exhibit bias, if any, aside from the Arbitrator having any pecuniary interest or any other personal contracts with the appointing party.

The law in this regard is well settled.

In the case of Ladli Construction Company (P) Ltd. Vs. Punjab Police Housing Corporation Ltd. and Others, which was the case of a Government Company who appointed an Executive Engineer in respect of the disputes in a construction contract. It is observed in para 15 of the judgment upon consideration of the arbitration clause in the agreement between the parties that the contractor consciously agreed for reference of the disputes to the arbitration of the Chief Engineer of the Corporation. The contractor had full knowledge of the fact that the Chief Engineer was in full control and supervision of the Corporation. It agreed for resolution of the disputes by him. This was despite the fact that the Chief Engineer had inspected the progress of the work of the Contractor and notified him of his slow progress. It was held that in terms of the contract even the inspection of the Contractor did not disqualify him as an Arbitrator. It was further observed that no steps were taken for his removal immediately.

My attention is drawn to the provision contained in Section 13 of the Arbitration and Conciliation Act, 1996 which relates to the challenge procedure. u/s 13 a party who intends to challenge an Arbitrator has to send him a reasoned statement of the reasons for the challenge. This would have to be decided by the Arbitral Tribunal itself.

In the case of Indian Oil Corporation Ltd. and Others Vs. Raja Transport (P) Ltd., also a similar opposition to the Arbitrator has been considered in paras 13, 14, and 15 thus:

Arbitration is a binding voluntary alternative dispute resolution process by a private forum chosen by the parties. It is quite common for Governments, statutory corporations and public sector undertakings while entering into contracts, to provide for settlement of disputes by arbitration, and further provide that the arbitrator will be one of its senior officers. If a party, with open eyes and full knowledge and comprehension of the said provision enters into a contract with a Government/statutory corporation/public sector undertaking containing an arbitration agreement providing that one of its Secretaries/Directors shall be the arbitrator, he cannot subsequently turn around and contend that he is agreeable for settlement of the disputes by arbitration, but not by the named arbitrator who is an employee of the other party.

No party can say he will be bound by only one part of the agreement and not the other part, unless such other part is impossible of performance or is void being contrary to the provisions of the Act, and such part is severable from the remaining part of the agreement. The arbitration clause is a package which may provide for what disputes are arbitrable, at what stage the disputes are arbitrable, who should be the arbitrator, what should be the venue, what law would govern the parties, etc. A party to the contract cannot claim the benefit of arbitration under the arbitration clause, but ignore the appointment procedure relating to the named arbitrator contained in the arbitration clause.

It is now well settled by a series of decisions of this Court that arbitration agreements in government contracts providing that an employee of the Department (usually a high official unconnected with the work or the contract) will be the arbitrator, are neither void nor unenforceable.

The case of International Airports Authority of India Vs. K.D. Bali and Anr, relates to appointment of an Arbitrator by a Chief Justice of the Court u/s 11(6) and (8) of the Act. In that case the Chairman and Managing Director (CMD) of the Government Company which contracted with the other party named an Arbitrator. The other party to the contract sought appointment of an independent and impartial Arbitrator by the relevant Chief Justice u/s 11 of the Act. The provisions of Sections 6 and 8 came to be considered as also the fact that the Arbitrator was appointed by the Corporation and the other party had moved for appointment of the Arbitrator. At that stage it was observed that the qualification required of the Arbitrator and the other consideration to secure his appointment would have to be seen. It was held that in the case of a named Arbitrator the Court would normally give effect to the provisions of the arbitration agreement, but when there was material to create reasonable apprehension that the person was not likely to act independently and impartially, the Court may appoint a person other than the named Arbitrator upon examination of the relevant facts which would indicate the partiality of the Arbitrator. Seeing the work already done of the CMD and considering the stage at which the application was made and upon seeing the material the Court held that the CMD cannot be appointed as Arbitrator.

In fact, in this case relied upon by Mr. Modi the Supreme Court laid down the parameters of absence of bias in a petition u/s 11 of the Act against a sole Arbitrator appointed under the terms of the contract. The Supreme Court observed that there must be a real likelihood of bias and not a mere suspicion before a proceeding can be quashed on that ground. Despite various grounds, the Court found no presumable apprehension of bias.

Similarly in the case of Mussafar Shah Vs. M.M.T.C. and Another, the Court refused to revoke the authority of an arbitrator appointed by a Corporation even if he was appointed in other matters of such Corporation or had earlier given a legal opinion to such Corporation.

In the case of Saurabh Kalani Vs. Tata Finance Ltd., the Arbitrator who ceased to be in the employment of a company in the group of companies of the Lender which was a financial institution 15 years back was held not to be biased in view of the period of time over which he had any connection with the Lender company, which appointed him an Arbitrator. It was observed:

The fact that the Arbitrator ceased from the employment of the Tata International Ltd. nearly 15 years back would make an allegation of bias clearly untenable. In Locabail''s case the Court has observed that "The greater the passage of time between the event relied on as showing a danger of bias and the case in which the objection is raised, the weaker (other things being equal) the objection will be.

In the case of Novel Granites Ltd. and Another Vs. Lakshmi General Finance Ltd. and Another, it was similarly held that an Arbitrator being appointed in a number of disputes between the financial institutions which appoints him and other borrowers is not sufficient to constitute bias. It was observed that:

Inasmuch as there is no prohibition for a company to have a panel of persons for appointing as arbitrators to the disputes between that company with other individuals, there cannot be any objection for appointing a person from such panel as an arbitrator in any number of disputes. Therefore, there is no illegality in the appointment of Arbitrator and hence, the Arbitration proceedings can continue.

The cases need not be multiplied.

The test in this case is thus:

If the petitioner filed an application u/s 11 so soon as the lender gave notice of demand and notified the petitioner that it would be appointing an Arbitrator, would the Court not have allowed the lender to appoint the learned Arbitrator ? The Court would not have interfered with the appointment. There was no material to create any reasonable apprehension that the learned Arbitrator in this case would not be independent or impartial. He indeed is independent; he held a judicial position; independence and impartiality are the hallmark of the trained judicial officer. There would be no reason for the Court to be suspicious that he would not perform his duties as an Arbitrator merely because he has many arbitrations of the Lender and other banks and financial institutions.

It is, therefore, seen that no party is entitled to come to an opinion of bias simplicitor upon appointment of any person. No creditor or a Loanee can decide who would be an Arbitrator. Any one deemed eligible could be appointed and allowed to be appointed as Arbitrator, subject to his/her a beneficial interest, or personal contracts with the lender. The petitioner in the instant case has sought to itself adjudicate upon the independence and impartiality of the Arbitrator. It has no right or authority to do so. Its act is rather impertinent and insolent. The learned Arbitrator would have been perfectly justified even if he had not answered the questions. The learned Arbitrator was not duty bound to answer any question with regard to other arbitrations. In fact he had to keep the confidence in respect of the other arbitrations held by him whether they be of the Lender or any other bank or financial institutions. He would have breached such implicit confidentiality had he mentioned details about any of those.

The petitioner sought to take the adjudication in his own hand. He refused to appear before the Arbitrator. The refusal is seen to be without merit and devoid of reasonableness and without any cause for any perceived bias and even before giving the Arbitrator an opportunity to prove himself. Consequently based upon the act of the petitioner itself the learned Arbitrator passed an ex-parte award. He could do no better. He need wait no longer. He gave a full opportunity at the first instance of a further one month to enable the petitioner to file its statement of defence. Nothing was filed. Instead the petitioner treaded a wrong path. It failed to show any merits of its defence. Nothing is shown even to Court. The petitioner allowed the ex-parte award to be passed and upon such conduct made bold to rely upon the judgment in the case of Prakash Narain Sharma Vs. Burmah Shell Cooperative Housing Society Ltd., in which an ex-parte award was set aside. However in that case a Co-operative Society challenged the appointment of an Arbitrator in a dispute with the member of the Society in a Civil Suit. The Civil Judge restrained the Arbitrator from proceeding with the arbitration. There was a dispute whether the order was communicated to the society. The society failed to appear. The Arbitrator proceeded ex-parte and made an award upholding claim of the other party. In the facts of that case the ex-parte award was set aside.

I do not see how that case can apply to the facts of the present case. Ex-parte orders for stay are not liable to challenge. In fact, as in this case, there would be no ground of challenge u/s 34 of the Act in such cases. Once the Arbitrator is seen to have proceeded validly there can be no interference with the ex-parte award.

Mr. Jha on behalf of the petitioner drew my attention to various inapplicable judgments which do not relate to arbitration at all.

In the case of Trilok Sudhirbhai Pandya Vs. Union of India (UOI) and Others, the question of bias was considered in respect of the competent authority discharging a public function of determining the compensation in a land acquisition. In that case the competent authority discharged the public function from the premises of the private corporation for whom the user was being acquired and from which private corporation the competent authority was directly getting pay allowance, perquisites, rent free accommodation and vehicle. Under those circumstances the Supreme Court held that there could be a reasonable apprehension that he will not act fairly and would be biased in favour of (and not against) the private Corporation though being a government servant.

The case is wholly different from the arbitration in which the authority must be presumed to act fairly unless shown not to have so acted.

In the case of Ranjit Thakur Vs. Union of India (UOI) and Others, the trial being a court-martial under the Army Act, 1950 was opposed. The analogy in that judgment, therefore, cannot apply.

In the case of Narinder Singh Arora Vs. State (Govt. of NCT of Delhi) and Others, when a Judge, who had initially rescued from a matter for personal reasons and which was tried by another Judge, sought to hear a revision petition from the order of acquittal. The Supreme Court observed that the previous conduct of the Judge would require to be seen to see that he was above suspicion, a case wholly unlike the case of arbitration by the party having the right and authority by agreement to appoint an Arbitrator.

Mr. Jha also referred to the judgment in the case of Bihar State Mineral Dev. Corpn. and Another Vs. Encon Builders (I) Pvt. Ltd., in which the Managing Director of a Government Corporation entered into an agreement with the Contractor which was to be terminated by the Managing Director. Upon the termination the Managing Director was to impose fine depending upon the gravity of the violation of the agreement. The Managing Director got the balance job done by the another agent upon the alleged failure of the Contractor and alleged negligence. The Contractor made counter claims and challenged the work allotted to another agency. Under those circumstances when the Managing Director had acted as party to the contract it was held that the test of bias against him stood fully satisfied and he lacked the jurisdiction to arbitrate. Consequently the Supreme Court dictum that the Contractor had entered into contract "with eyes wide open" became irrelevant and the order was without jurisdiction and consequently a nullity. In that case the Managing Director had the absolute discretion to terminate the contract. He would then be a Judge in his own cause and justice would not be manifestly seen to be done. Hence the Supreme Court observed that such actual bias led to automatic disqualification in view of the interest of the arbitrating authority in the outcome. It is in these circumstances that the Supreme Court considered various other cases of bias not relating to the appointment of an Arbitrator as per the terms of the agreement between the parties. Consequently the Supreme Court held that in such a case the exercise of jurisdiction was a nullity and the procedural law of waiver or estoppel do not apply.

With regard to the merits of the case, Mr. Jha sought to go into evidence which the Court in its jurisdiction u/s 34 cannot go into. No such case on merits was brought before the learned Arbitrator. Nevertheless in the rejoinder to the petition the petitioner has shown photocopies of certain documents registered with the ROC as termed by the petitioners. The photocopies of the documents relied upon by the claimant show certain calculations made which are additions in certain blanks as finally submitted to the learned Arbitrator. Mr. Jha would contend that these are interpolations rendering the documents invalid. The additions are the name and address of the member of PDCs. Further there is an addition of the interest. The former addition is most immaterial; the later addition is in terms of the agreement. Even if it was not so this is a matter which had to be brought up only before the learned Arbitrator and if so done the petitioner would itself have seen whether the learned Arbitrator acted independently and impartiality and considered its defence on merits. The petitioner has lost that opportunity. This Court cannot go into such evidence.

The reliance upon the judgment in the case of Seth Loonkaran Sethiya and Others Vs. Mr. Ivan E. John and Others, by Mr. Jha with regard to the scrutiny of documents to see the material irregularity, if any, is equally misconceived.

In view of the above the petition is wholly misconceived and is consequently dismissed.