General Insurance Employees Co. Operative Credit Soceity Ltd. Vs Smt Bharthi Hande

CO-OPERATIVE CREDIT SOCIETY LTD. (A SOCIETY REGISTERED UNDER MULTI-STATE CO-OPERATIVE SOCIETIES ACT) AJJARKAD, COURT BACK ROAD, UDUPI - 576101. REP. BY ITS SECRETARY I/C. MR. PRABHAKAR K. S. AGE: 52 YEARS

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…APPELLANT

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(BY SRI. MAHESH R. UPPIN, ADVOCATE)

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AND:

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SMT BHARATHI HANDE W/O. SHARATH KUMAR, AGE: 51 YEARS, SUVIDHA HOMES, VIBHUDAPRIYA NAGAR, POST: KUNJIBETTU, UDUPI - 576102

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SRI RAMADAS SHETTIGAR S/O ANAND SHETTIGAR

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AGE: 59 YEARS UNITED INDIA INSURANCE CO. LTD. DIVISIONAL OFFICE UDAYAVANI BUILDING TILE FACTORY ROAD MANIPAL, UDUPI - 576104

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SRI. S GURURAJ AITHAL S/O NOT KNOWN TO THE APPELLANT AGE 48 YEARS ADVOCATE AND ARBITRATOR NEAR GIECC SOCIETY HEAD OFFICE COURT BACK ROAD, AJJARKAD UDUPI - 576101

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…RESPONDENTS

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THIS MFA IS FILED U/S.37(1)(c) OF THE ARBITRATION AND CONCILIATION ACT, 1996, AGAINST THE JUDGMENT DT.20.03.2025 PASSED IN A.P.NO.12/2024 ON THE FILE OF THE II ADDITIONAL DISTRICT/COMMERCIAL COURT JUDGE, UDUPI, ALLOWING THE PETITION FILED U/S.34 OF THE ARBITRATION AND CONCILIATION ACT, 1996 R/W SEC.84(5) OF THE MULTI STATE CO-OPERATIVE SOCIETIES ACT, 2002.

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THIS APPEAL, COMING ON FOR ORDERS, THIS DAY, JUDGMENT WAS DELIVERED THEREIN AS UNDER:

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CORAM: HON'BLE MR. VIBHU BAKHRU ,CHIEF JUSTICE and HON'BLE MR. JUSTICE C M JOSHI

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ORAL JUDGMENT

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(PER: HON'BLE MR. VIBHU BAKHRU,CHIEF JUSTICE)

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The appellant has filed the present appeal under Section 37(1)(c) of the Arbitration and Conciliation Act, 1996 [A&C Act] impugning an order dated 20.03.2025 passed by the learned II Additional District and Sessions Judge, Udupi [Commercial Court] in A.P. No.12 of 2024. The respondent No.1 had filed the said petition under Section 34 of the A&C Act impugning an arbitral award dated 10.04.2024 [impugned award].

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The learned Commercial Court had set aside the impugned award on the ground that the award was delivered by the arbitral tribunal comprising of the sole arbitrator who was ineligible under Section 12(5) of the A&C Act.

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The appellant is a multi state cooperative society governed under the Multi State Cooperative Societies Act, 2002 [MSCS Act]. The respondent No.1 was functioning as a Secretary of the appellant society during the period 01.04.2018 to 31.03.2023. It is alleged that respondent No.1 had in collusion with respondent No.2, who was at the material time the President of the Society,

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committed various acts of omission and commission in administration of the appellant society.

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It is alleged that during the said period, respondent Nos. 1 and 2 had without any resolution of the Board of the appellant, invested Rs.90 lakhs of the appellant society in Kamalakshi Vividhoddesha Sahakara Sangha Ltd., [KVS Sangha]. It is alleged that due to officials of the KVS Sangha mismanaging and misappropriating the funds deposited with KVS Sangha, the appellant society has been unable to recover the amount deposited with KVS Sangha. In the aforesaid context, the appellant society had raised a dispute regarding the respondent Nos. 1 and 2 acting without authority and causing a loss to the appellant Society. The said dispute was preferred under Section 84 of the MSCS Act before the Registrar of Cooperative Society. The said Registrar referred the disputes to a sole arbitrator.

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Respondent Nos.1 and 2 had contested the said proceedings. However, the Arbitral Tribunal found in favour of the appellant society and rendered the impugned award. The Arbitral Tribunal awarded an amount of ₹ 90 lakhs in favour of the appellant and against the respondent Nos.1 and 2 along with

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interest at the rate of 9.5% per annum. Additionally, the Arbitral Tribunal awarded costs quantified at ₹1,61,600/-, in favour of the appellant.

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Admittedly, the sole arbitrator was engaged as a counsel for the appellant society in O.S. No.2/2015, which was pending before the Additional Civil Judge, Udupi at the material time [from 12.01.2015 to 10.01.2024]. Respondent No.1 had also produced certified copies of the order sheets in O.S. No.2/2015, the vakalathnama, written statement, interim application, memo and orders passed on interim application in the said proceedings. These documents established that the sole arbitrator was acting on behalf of the appellant in the said proceedings.

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The learned Commercial Court rightly set aside the impugned award as the sole arbitrator was ineligible to function as an arbitrator.

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The impugned award is also the subject matter of challenge in A.P. No.10 of 2024, which was allowed by the learned Commercial Court. The appellant had preferred an appeal against the said order being M.F.A. No.3229 of 2025, which has been

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dismissed by a separate order passed by this court. The relevant

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extract of the said order is set out below.

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"3. We consider it apposite to refer to Sub-

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sections (1), (2) and (5) of Section 12 of the A&C Act.

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The same are set out below.

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" 12. Grounds for challenge. —(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances,—

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(a) such as the existence 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; and

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(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months.

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Explanation 1.—The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.

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Explanation 2.—The disclosure shall be made by such person in the form specified in the Sixth Schedule.

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(2) An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay, disclose to the parties in writing any circumstances referred to in sub-section (1) unless they have already been informed of them by him.

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(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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In terms of Section 12(1) of the A&C Act, an

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arbitrator is required to disclose in writing any

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circumstances of existence 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 and impartiality of an arbitrator.

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In terms of explanation 1 to Section 12(1) of

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the A&C Act, the Arbitrator is required to be guided by

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the circumstances as stated in the Fifth Schedule for determining whether the circumstances exist which give

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rise to justifiable doubts. In terms of explanation 2 to Section 12(1) of the A&C Act, the disclosure is required to be made in the form as specified in the Sixth Schedule. There is no material on record to indicate that the sole arbitrator had made any such disclosure as is mandatory.

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In terms of Section 12(5) of the A&C Act, an

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arbitrator is ineligible to act as an arbitrator, if his relationship with the parties or counsel or the subjectmatter of dispute, falls under any of the categories as specified in the Seventh Schedule. The provisions of Section 12(5) of the A&C Act cannot be waived except by an agreement in writing.

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It is relevant to refer to the following entries

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in the Seventh Schedule.

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"Arbitrator's relationship with the parties or counsel

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The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.

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The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.

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The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.

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The arbitrator is a lawyer in the same law firm which is representing one of the parties.

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The arbitrator’s law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties.

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The arbitrator is a legal representative of an entity that is a party in the arbitration."

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In the present case, it is clear that the sole arbitrator has incurred the ineligibility in terms of Section 12(5) of the A&C Act, as read with the Seventh Schedule.

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The ineligibility of the sole arbitrator strikes at the very jurisdiction of the arbitrator to adjudicate the disputes between the parties. In HRD CORPORATION (MARCUS OIL AND CHEMICAL DIVISION) VS. GAIL (INDIA) LTD.,: (2018) 12 SCC 471 , the Supreme Court had accepted the view that if the arbitrator was ineligible to act under Section 12(5) of the A&C Act; the provisions of Section 14 of the A&C Act would be applicable. The Arbitrator would become de jure or de facto unable to perform his

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functions. The relevant extract of the said decision is

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set out below.

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"12. After the 2016 Amendment Act, a dichotomy is made by the Act between persons who become “ineligible” to be appointed as arbitrators, and persons about whom justifiable doubts exist as to their independence or impartiality. Since ineligibility goes to the root of the appointment, Section 12(5) read with the Seventh Schedule makes it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes “ineligible” to act as arbitrator. Once he becomes ineligible, it is clear that, under Section 14(1)( a ), he then becomes de jure unable to perform his functions inasmuch as, in law, he is regarded as “ineligible”. In order to determine whether an arbitrator is de jure unable to perform his functions, it is not necessary to go to the Arbitral Tribunal under Section 13. Since such a person would lack inherent jurisdiction to proceed any further, an application may be filed under Section 14(2) to the Court to decide on the termination of his/her mandate on this ground. As opposed to this, in a challenge where grounds stated in the Fifth Schedule are disclosed, which give rise to justifiable doubts as to the arbitrator's independence or impartiality, such doubts as to independence or impartiality have to be determined as a matter of fact in the facts of the particular challenge by the Arbitral Tribunal under Section 13. If a challenge is not successful, and the Arbitral Tribunal decides that there are no justifiable doubts as to the independence or impartiality of the arbitrator/arbitrators, the Tribunal must then continue the arbitral proceedings under Section 13(4) and make an award. It is only after such award is made, that the party challenging the arbitrator's appointment on grounds contained in the Fifth Schedule may make an application for setting aside the arbitral award in accordance with Section 34 on the aforesaid grounds. It is clear, therefore, that any challenge contained in the Fifth Schedule against the appointment of Justice Doabia and Justice Lahoti cannot be gone into at this stage, but will be gone into only after the Arbitral Tribunal has given an award. Therefore, we express no opinion on items contained in the Fifth Schedule under which the appellant may challenge the appointment of either

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arbitrator. They will be free to do so only after an award is rendered by the Tribunal."

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[emphasis added]

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In Kotak Mahindra Bank Ltd. vs Narendra

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Kumar Prajapat : 2023 DHC 3705 , a division bench of the

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Delhi High Court, had held that the arbitral award rendered by an arbitrator who was ineligible under Section 12(5) of the A&C Act would be a nullity and thus could be challenged even at the stage of execution of the enforcement of the Arbitral Award.

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In a recent decision in Mahavir Prasad Gupta and sons v. State (NCT of Delhi) :2025 SCC OnLine Del 4241 , the Division Bench of the Delhi High Court (of which one of us was a member) had after referring to various precedents summarized the principles as under:

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" 84. In view of the above discussion, the legal position on the unilateral appointment of the Sole and Presiding Arbitrator is summarized as under:

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a) Mandatory Requirement : Any arbitration agreement providing unilateral appointment of the sole or presiding arbitrator is invalid. A unilateral appointment by any party in the arbitrations seated in India is strictly prohibited and considered as null and void since its very inception. Resultantly, any proceedings conducted before such

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unilaterally appointed Arbitral Tribunal are also nullity and cannot result into an enforceable award being against Public Policy of India and can be set aside under Section 34 of the Act and/or refused to be enforced under Section 36 of the Act.

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b) Deemed Waiver : The proviso to Section 12(5) of the Act requires an express agreement in writing. The conduct of the parties, no matter how acquiescent or conducive, is inconsequential and cannot constitute a valid waiver under the proviso to Section 12(5) of the Act. The ineligibility of a unilaterally appointed arbitrator can be waived only by an express agreement in writing between the parties after the dispute has arisen between them. Section 12(5) of the Act is an exception to Section 4 of the Act as there is no deemed waiver under Section 4 of the Act for unilateral appointment by conduct of participation in the proceedings. The proviso to Section 12(5) of the Act requires an ‘express agreement in writing’ and deemed waiver under Section 4 of the Act will not be applicable to the proviso to Section 12(5) of the Act.

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c) Award by an Ineligible Arbitrator is a Nullity : An award passed by a unilaterally appointed arbitrator is a nullity as the ineligibility goes to the root of the jurisdiction. Hence, the award can be set aside under Section 34(2)(b) of the Act by the Court on its own if it ‘finds that’ an award is passed by unilaterally appointed arbitrator without even raising such objection by either party.

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d) Stage of Challenge : An objection to the lack of inherent jurisdiction of an arbitrator can be taken at any stage during or after the arbitration proceedings including by a party who has appointed the sole or presiding arbitrator unilaterally as the act of appointment is not an express waiver of the ineligibility under proviso to Section 12(5) of the Act. Such objection can be taken even at stage of challenge

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