Finance Company's Own Legal Manager Cannot Appoint Arbitrator — Award Passed by Such Arbitrator Is Non-Est and Inexecutable: Andhra Pradesh High Court

"Once the infrastructure collapses, the superstructure is bound to collapse — a person who is statutorily ineligible can nominate no one", Andhra Pradesh High Court has struck down an arbitration award obtained by a finance company through a sole arbitrator unilaterally appointed by its own Legal Manager, holding the award to be without jurisdiction, non-est in law, and wholly incapable of execution.

A Division Bench of Justice Ravi Nath Tilhari and Justice Balaji Medamalli set aside the attachment order passed in execution proceedings and closed the pending Section 34 proceedings as a futile exercise, granting liberty to the parties to initiate fresh arbitration in accordance with law.

Background of the Case

M/s. IKF Finance Limited, Vijayawada, had advanced a loan to Katta Srinivasu under Loan Agreement No. LN148437. Upon default, the Finance Company's Legal Manager, D. Srinivasa Rao, issued a notice dated 23.11.2019 and thereafter, by a letter dated 18.12.2019, unilaterally appointed Sri B. Chalapathi Suri — a retired Junior Civil Judge — as the sole arbitrator to adjudicate the dispute. The borrower and guarantor neither replied to the notice nor participated in the proceedings. An ex parte award dated 20.01.2021 was passed against them in AOP No. 6 of 2020.

The Finance Company then filed Execution Petition No. 676 of 2022 to execute the award. On 30.09.2022, the Execution Court passed an order attaching the bank account of the petitioner at UCO Bank, Athili Branch, West Godavari District, directing the Garnishee bank to withhold all funds. Aggrieved, the petitioner challenged this order in CRP No. 2345 of 2022 and also filed a Section 34 petition to set aside the award. The non-disposal of his stay application in the Section 34 proceedings formed the subject matter of CRP No. 419 of 2026. Both revision petitions were heard together.

Legal Issues

The Court framed four interconnected questions: whether the unilateral appointment of the sole arbitrator by the Finance Company was invalid; whether the award passed by such an arbitrator was without inherent jurisdiction; whether the petitioner's silence throughout the proceedings amounted to waiver under Section 4 of the Arbitration and Conciliation Act, 1996; and whether the jurisdictional challenge could be raised for the first time in these revision proceedings.

Court's Observations and Judgment

On Ineligibility of the Legal Manager to Appoint — "Once the Identity is Lost, the Power to Nominate is Obliterated"

The Court traced the settled law through a trilogy of Supreme Court decisions. In TRF Ltd. v. Energo Engg. Projects Ltd. (2017) 8 SCC 377, the Supreme Court had held that once a person becomes ineligible by operation of law to act as an arbitrator, he cannot nominate another person either — for ineligibility strikes at the root of his entire power to arbitrate or get it arbitrated by a nominee.

In Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2020) 20 SCC 760, the Supreme Court extended this principle to the appointing authority: a party having interest in the outcome of the dispute must not have the power to appoint a sole arbitrator, since "a person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator." Whatever advantage a party derives by nominating an arbitrator of its choice goes uncounterbalanced when the other party has no equal say — unlike a three-member panel situation.

Applying these principles, the Division Bench found that the Legal Manager of IKF Finance Limited — being an employee and manager of the party to the dispute — fell squarely under multiple categories of the Seventh Schedule to the Act, particularly Categories 1, 2, 3, 5 and 12. "The Legal Manager of the Finance Company would be covered under more than one category. So, legally ineligible to be arbitrator and for that reason also ineligible to appoint/nominate the 2nd respondent as arbitrator."

On Automatic Termination of Mandate — No Challenge Before the Arbitrator Required

The Court drew a critical distinction between ineligibility under Section 12(5) and ordinary procedural challenges. Relying on Bhadra International (India) Pvt. Ltd. v. Airports Authority of India (2026 SCC OnLine SC 7), the Court held that when an arbitrator's ineligibility stems from operation of law under the Seventh Schedule, his mandate stands automatically terminated — without requiring the aggrieved party to raise a challenge before the arbitrator under Section 16.

"A person who is ineligible to be appointed as an arbitrator in terms of Section 12(5) becomes de jure unable to perform functions according to Section 14. Resultantly, the mandate of such an ineligible person gets automatically terminated."

The Court clarified the procedural path: where the award is yet to be passed, the aggrieved party may approach the Court under Section 14 read with Section 15 for appointment of a substitute arbitrator. Where the award has already been passed — as in the present case — the challenge lies under Section 34.

On Waiver — Section 4 Cannot Override Section 12(5)

The Finance Company's most potent argument was that the petitioner's complete silence — non-reply to notice, non-participation in arbitration, non-objection in execution proceedings — amounted to waiver under Section 4 of the Act. The Court rejected this argument comprehensively.

The Court held that Section 4 operates on a fundamentally different plane — it covers waiver of objection to non-compliance with derogable, non-mandatory procedural provisions. The waiver of a party's right to object to unilateral appointment of an ineligible sole arbitrator is governed exclusively by the proviso to Section 12(5), which requires an express agreement in writing entered into after disputes have arisen between the parties. "Section 4 of the Arbitration Act necessarily implies that the parties cannot proceed with arbitration in derogation of a mandatory provision."

Since there was no express written agreement waiving Section 12(5) in the present case — and none was even claimed — the plea of waiver was dead on arrival. "The conditions under the proviso are not satisfied and consequently, the plea of waiver raised by the learned counsel for the respondents has no legs to stand." Mere silence, non-reply, or non-participation could not constitute the "clear, unequivocal written agreement" demanded by the proviso.

On Retrospectivity — Unilateral Sole Arbitrator Appointments Covered

The Finance Company could not take shelter behind the prospectivity direction given by the Supreme Court's Constitution Bench in Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV) (2025) 4 SCC 641. The Court carefully analysed that the prospectivity direction in that case was expressly limited to the appointment of three-member arbitral tribunals — intended to protect completed and ongoing proceedings involving three-member panels in public-private contracts.

"So far as the appointment of the sole Arbitrator unilaterally is concerned, the law laid down has not been made prospective. Consequently, the principles of law as laid down in Central Organisation for Railway Electrification shall apply retrospectively to the appointment of the sole arbitrator unilaterally."

On Challenge at Execution Stage — Award Without Jurisdiction is Non-Est

The Finance Company contended that the jurisdictional plea had not been raised before the arbitrator and could not now be raised in revision proceedings challenging an execution order. The Court rejected this as well, relying on the recent Supreme Court ruling in Bhadra International which had authoritatively settled that a challenge to an arbitrator's ineligibility can be raised at any stage of proceedings — including collateral execution proceedings.

"A challenge to an arbitrator's ineligibility could be raised at any stage because an award passed in such circumstance is non-est, i.e., it carries no enforceability or recognition in law." The Court drew the analogy to civil court decrees: just as a decree passed by a civil court lacking subject-matter jurisdiction is coram non judice and can be challenged in execution, an arbitral award passed without inherent jurisdiction suffers from the identical infirmity. "An arbitrator who lacks jurisdiction cannot make an award on the merits."

On Article 14 — Unilateral Appointment Violates Constitutional Equality

The Court further grounded its ruling in constitutional principle. A clause that allows one party to unilaterally appoint a sole arbitrator violates Article 14 of the Constitution of India, for it breaches the principle of equal treatment of parties — a principle that applies not merely to the conduct of arbitral proceedings but to the very appointment process. "The appointment of the sole Arbitrator unilaterally appointed by the Finance Company is violative of Article 14 of the Constitution of India. It was invalid."

Both civil revision petitions were allowed. The attachment order dated 30.09.2022 was set aside. The arbitration award dated 20.01.2021 was declared to be without jurisdiction and inexecutable. The pending Section 34 proceedings before the VIII Additional District Judge, Vijayawada were closed as a futile exercise. Liberty was granted to both parties to initiate fresh arbitration proceedings in accordance with law. No order as to costs.

Date of Decision: 10.04.2026