In a significant ruling, the Karnataka High Court held that an individual named as an arbitrator in a notice issued under Section 21 of the Arbitration and Conciliation Act, 1996, cannot assume jurisdiction and pass orders without the consent of the opposite party or without an order from the court under Section 11 of the Act. Justice Suraj Govindaraj made this observation while deciding a writ petition filed by the legal heirs of a deceased borrower against the unilateral appointment of an arbitrator by Shriram Transport Finance Company Limited.
The petition was filed by Smt. Manjula and her son Tharun Gowda, the widow and son of Late Manjunath. Manjunath had taken two vehicle loans from Shriram Finance. After his demise in August 2018, Shriram issued legal notices on July 27, 2019, demanding repayment of over Rs. 28 lakh for each loan and stating that an arbitrator would be appointed if payment was not made.
The petitioners challenged the entire arbitration proceedings and the interim order passed by the arbitrator allowing vehicle repossession, arguing that the arbitrator had entered reference and issued the order on July 12, 2019 — even before the notice appointing him was issued.
"A person who is the named Arbitrator in a notice issued under Section 21 of the Arbitration and Conciliation Act, 1996 cannot enter reference and pass orders without the other person consenting thereto, or without an order of appointment of Arbitrator by institution or a Court under Section 11," the court firmly stated.
The petitioners contended that there was no arbitration agreement signed by them, as they were not parties to any contract with Shriram. They were merely legal heirs and had not agreed to any such arbitration. Furthermore, it was pointed out that the arbitrator passed the order even before being nominated and the claim petition was filed only later, on August 10, 2019.
The court also observed that the arbitration agreement was not produced on record by either party. Despite multiple opportunities, Shriram failed to furnish any agreement indicating the presence of an arbitration clause, let alone a named arbitrator. Even assuming such a clause existed, the court noted, the clause did not authorize a unilateral appointment or name a specific arbitrator.
Justice Govindaraj condemned the actions of both the finance company and the arbitrator. He remarked, The arbitrator acted as a stooge and rubber stamp of Shriram and has been more loyal than the king even before he was nominated by Shriram. The court was particularly critical of the arbitrator's conduct in passing an interim order under Section 17 of the Act on July 12, 2019, based solely on Shriram’s unilateral statements.
Calling the entire process a misuse of arbitral mechanisms, the court noted that Shriram secured police assistance and took possession of the vehicles based on an invalid order. This is a complete abuse of the process of law, the court observed. It added that such conduct by private entities using the garb of arbitration without proper legal procedures sets a dangerous precedent.
The court rejected the preliminary objection raised by Shriram that a writ petition under Article 226 is not maintainable against a private entity. It emphasized that the misuse of legal process and abuse of arbitral power warranted intervention by a constitutional court.
"If a Constitutional Court does not come to the rescue of the Petitioners, that would amount to denial of justice," the court held, thereby affirming the maintainability of the writ petition.
Considering the gravity of the matter, the court also directed the Director General of Police, Karnataka, to appoint a senior officer to conduct an inquiry into the matter. The officer has been instructed to submit a report within six weeks and investigate any similar complaints if they exist.
In conclusion, the court quashed the orders passed by the arbitrator in Arbitration Case Nos. 1032/2019 and 1033/2019 and declared the entire arbitration proceedings void. The matter is scheduled to be relisted on July 30, 2025, for submission of the police inquiry report.
Case Title: Smt. Manjula & Anr. vs. Shriram Transport Finance Co Ltd & Ors.
Case No.: WP No. 10493 of 2020
Date of Judgment: 27 May 2025
Judge: Justice Suraj Govindaraj
Court: High Court of Karnataka, Bengaluru
