The Madras High Court on Tuesday flagged concerns about the Central government's failure to notify key provisions of the Arbitration and Conciliation (Amendment) Act, 2019, that empower courts to designate arbitral institutions [Thomas Varghese Vs Sundaram Finance].

Justice Anand Venkatesh has made a fervent appeal to the executive to operationalise this arbitral institution recognition regime envisaged under the Arbitration and Conciliation Act,1996, following its 2019 amendment

“This Court makes a fervent appeal to the executive to notify the relevant provisions and bring those provisions into effect. 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 ruling said,

Notably, before the 2019 amendment, there was a mechanism under the Arbitration Act for the Chief Justice of a High Court to recognise arbitral institutions, namely institutional bodies that parties can approach to appoint an arbitral panel. For instance, the Nani Palkhivala Arbitration Centre is one such Centre which was designated by the Chief Justice of the Madras High Court.

On the other hand, after the 2019 amendment, the power to designate institutions as arbitral institutions was shifted to the Supreme Court or High Courts. The amended provisions also provided for the grading of such institutions by an Arbitration Council of India.

However, the provisions which laid down this new mechanism for recognising arbitral institutions have not yet been notified or enforced.

In his February 24 ruling, Justice Venkatesh flagged concerns that this has left the mechanism for designating arbitral institutions uncertain.

“Unfortunately, neither Section 2(c)(a) nor Section 11(3-A) have come into effect till date since it has not been notified. Therefore, there is a stalemate as on today since the Chief Justice has now been replaced by the term 'Court' and there is no mechanism for the Court to designate any arbitral institutions,” the order read.

The absence of a notified institutional designation framework meant that courts currently have no statutory mechanism to formally recognise or designate arbitral institutions.

As a result, whenever a challenge is raised to an arbitral award passed by an arbitrator set up by an arbitration institution, courts are compelled to independently examine the credibility of the institution concerned. The Court explained that the failure to notify the new arbitral institution regime has led to problematic practices.

“This Court must also take judicial notice of the fact that many of the financial institutions, in order to get over the judgment of the Apex Court in Perkins case (which barred unilateral appointment of sole arbitrators by parties who have a stake in the dispute), have formed associations and given them the name of an arbitral institutions which is manned by their own Arbitrators and they make it look as if the Arbitrator is appointed by the institution.”

The Court further noted,

“This is clearly a ruse to get over the judgment of the Apex Court and try to achieve indirectly what cannot be achieved directly.”

Justice Venkatesh observed that courts, therefore, have to be cautious while dealing with arbitral awards passed by sole arbitrators that have been appointed by such arbitral institutions.

“Courts must be wary and ensure that the genuineness or otherwise of the institution is gone into before recognising the Arbitrator appointed by such arbitral institutions.”

At the same time, the Court clarified that not every institutional appointment can be branded unilateral.

“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," it observed.

The Court added it was being compelled to perform a “balancing act” because of the legislative vacuum.

“There is no need for the Court to perform all these balancing acts if only the executive notifies the amendments to enable Courts to designate arbitral institutions under Section 11(3-A) of the Act.”

It thus urged the executive to take corrective steps.

The observation was made while considering a challenge to an arbitral award passed by a sole arbitrator appointed through the Madras Chamber of Commerce and Industries (MCCI).

The dispute in which the arbitral reference was made arose from a vehicle loan agreement, under which Sundaram Finance Limited extended ₹20.15 lakh to the petitioner for the purchase of a vehicle. The petitioner’s father had signed the agreement as guarantor.

After defaults, the financier issued a demand notice in June 2021 seeking ₹21.91 lakhs. The borrower surrendered the hypothecated vehicle in November 2021, which was subsequently sold in February 2022 for ₹8 lakh. After appropriating the sale proceeds, the lender claimed a shortfall of ₹16.62 lakh and invoked arbitration through the MCCI as provided in the loan agreement.

The sole arbitrator appointed by MCCI proceeded ex parte after repeated notices to the borrower (petitioner) went unanswered and ultimately passed an award directing the borrower and his father to pay ₹15.76 lakh with 18 per cent interest from February 2022 till realisation, along with costs.

This came to be challenged by the borrower before the Madras High Court. He contended that the sole arbitrator in this case was unilaterally appointed, and was hit by Section 12(5) of the Arbitration Act and the Perkins doctrine.

The Court, however, disagreed and upheld the arbitral award.

"This Court is completely satisfied with the credibility of the arbitral institution namely MCCI and the parties having agreed to approach the said institution for appointment of Arbitrator, cannot be allowed to turn around and question the Arbitrator appointed by the arbitral institution," it held.

Notably, another ground raised in the petition was that the award had been passed against the petitioner’s father, who had died before the award was delivered. On this issue, the Court held:

“Whether there is knowledge or lack of knowledge, the award against a dead person is nullity in the eye of law.”

However, it clarified that the award would not collapse entirely.

“It will certainly bind the petitioner who was the principal borrower," the Court held.

The Court dismissed the petition and imposed costs of ₹25,000 on the petitioner.

The petitioner was represented by Advocate R Vaishali.

The respondent was represented by Senior Advocate Mukunth with Advocate M Arunachalam.

[Read Judgment]