Notice stating right to initiate Arbitration not a valid notice under Section 21 of Arbitration and Conciliation Act, 1996.

The Delhi High Court has ruled that a notice issued by a party merely stating its right to initiate arbitral proceedings which it would subsequently initiate if the payment was not made by the opposite party is a unilateral communication which does not qualify as a notice under Section 21 of the Arbitration and Conciliation Act, 1996.
In the matter of Shriram Transport Finance Co. Ltd. vs Shri Narender Singh (FAO (COMM) 179/202) decided on 13.10.2022 by the Hon’ble High Court of Delhi

FACTS: The appellants Shriram Transport Finance Co. Ltd filed this appeal before the Delhi High Court against the judgment of the learned District Judge which allowed a petition seeking to set aside the Arbitral Award dated 16.07.2019 filed by the Respondent under Section 34 of the Arbitration and Conciliation Act, 1996, primarily on the grounds that there was non-compliance with Section 21 of the Act and non-disclosure under Section 12 of the Act.

ISSUE: Whether the letters issued by the Appellant company dated 20.09.2018 and 27.09.2018 constituted valid notice under Section 21 of the Act.

OBSERVATIONS: The Hon’ble High Court to appreciate the legislative intent of Section 21 of the Act observed that the said Section ‪shows that Arbitral proceedings ‪commence on the date on which the request for the dispute to be referred to Arbitration is received by the concerned Respondent. Therefore, the commencement of Arbitral proceedings is incumbent on ‪the “receipt of such request or notice”. If no notice is received by the ‪concerned Respondent, there is no commencement of Arbitral ‪proceedings at all.

The Hon’ble High Court applied the principles laid down regarding Section 21 of the Act in the matter of Alupro Building Systems Pvt. Ltd v. Ozone Overseas Pvt. Ltd. reported as 2017 SCC OnLine Del 7228 and stated that the ‪parties may opt to waive the requirement of notice under Section 21 of ‪the Act. However, in the absence of such a waiver, the provision must ‪be given full effect to as the same is mandatorily required.

Adverting to the facts of the present case, the Appellant had sent a letter dated 20.09.2018 to the Respondent ‪stating that in the event the payment due ‪is not made within 7 days, the disputes would “stand referred to Arbitration” ‪and further that the Appellant Company shall initiate Arbitral ‪proceedings. The Hon’ble High Court categorically observed that the apparent Section 21 notice as being relied upon by the Appellant vide letter dated 20.09.2018 made two things clear:

‪(i) The letter dated 20.09.2018 merely states that the Appellant ‪Company has a right to initiate Arbitration proceedings so they ‪will initiate such proceedings.

‪(ii) The letter does not name any person as an Arbitrator, nor the fact ‪that the person is being appointed as an Arbitrator in terms of the ‪procedure set forth in the Loan Agreement.

Further, vide letter dated 27.09.2018, the Appellant unilaterally appointed an Arbitrator without marking the same to the Respondent nor any averment of service was made by the Appellant that the letter dated 27.09.2018 was in fact sent to the Respondent.

Consequently, the Division Bench of the High Court held that as the Appellant company merely stated in their letter dated 20.09.2018 that they have a right to initiate arbitration proceedings and there was no mention of any names of proposed Arbitrator the same could not be held to be a notice u/s 21 of the Act nor the letter dated 27.09.2018 would qualify as a notice as the same was never sent to the Respondent and the same was marked only to the Ld. Arbitrator. Hence, it was held that ‪that the Arbitral appointment made by the Appellant ‪Company was not made in accordance with the provisions of Section ‪21 of the Act