Unilateral appointment of arbitrator declared illegal; borrowers allowed to challenge award even during execution
In a judgment that could significantly alter the balance of power between lenders and borrowers, the Bombay High Court has set aside a ₹1.01 crore loan recovery arbitration award against borrowers—despite the fact that the award was never challenged earlier.
The ruling delivers a clear message to banks and NBFCs: arbitration awards passed by arbitrators unilaterally appointed by lenders are legally void and unenforceable—even at the recovery stage.
The case involved L&T Finance Ltd., which had obtained an arbitral award against two borrowers in 2019. Nearly seven years later, when the lender approached the court to execute the award and recover money, the entire recovery proceeding collapsed.
What Triggered the Case
L&T Finance had extended a mortgage loan to:
- Sangeeta Bhansali (borrower) and
- Aditya Bhansali (co-borrower)
When disputes arose, the lender:
- Invoked arbitration, and
- Unilaterally appointed a sole arbitrator, without the borrowers’ participation.
In August 2019, the arbitrator passed an award directing the borrowers to pay:
- ₹1.01 crore, plus
- Interest, costs, and arbitrator’s fees.
Crucially, the borrowers did not challenge the award under Section 34 of the Arbitration Act at that time.
Why the Recovery Case Fell Apart Years Later
When L&T Finance initiated execution proceedings before the Bombay High Court to recover the money, the borrowers raised a last-resort defence:
The arbitrator was illegally appointed by the lender alone, making the award void from the beginning.
Ordinarily, courts do not entertain such objections at the execution stage. But this case was different.
Supreme Court’s January 2026 Judgment Changed Everything
While the execution case was pending, the Supreme Court delivered a landmark ruling on January 5, 2026, in Bhadra International vs Airport Authority of India.
The Supreme Court held that:
- Unilateral appointment of a sole arbitrator by one interested party is illegal
- Such an arbitrator is “de jure ineligible”
- Any award passed in such a situation is non-est (legally non-existent)
Most importantly, the Court ruled that:
A challenge to such an award can be raised at any stage—even during execution proceedings.
This meant that even borrowers who never challenged an award earlier could still stop its enforcement.
Bombay High Court Applies Supreme Court Law
Justice Rajesh S. Patil of the Bombay High Court applied the Supreme Court’s ruling directly to the L&T Finance case.
The court held that:
- The arbitrator was unilaterally appointed by the lender
- Such appointment violates Section 12(5) of the Arbitration Act
- The arbitral award dated August 7, 2019 is void ab initio
- A void award cannot be treated as a decree
- The entire execution application must be dismissed
As a result:
- The ₹1 crore recovery claim failed
- The arbitration award was set aside
- L&T Finance must start arbitration afresh, if it wants to pursue recovery
Why This Judgment Matters to Borrowers
This ruling is a major relief for:
- Home loan borrowers
- Personal loan customers
- Business loan borrowers
- Anyone facing recovery based on arbitration awards
Many banks and NBFCs:
- Appointed arbitrators on their own
- Passed ex-parte awards
- Used those awards to attach properties or bank accounts
This judgment makes it clear:
If the arbitrator was appointed unilaterally, the award has no legal value—no matter how old it is.
Even If You Never Challenged the Award Earlier
Perhaps the most significant part of the judgment is this:
- Borrowers do not lose their rights simply because they failed to file a challenge earlier
- If the arbitrator lacked legal jurisdiction, the award is a nullity
- Jurisdictional defects cannot be cured by consent, delay, or silence
This overturns many earlier High Court views and brings uniformity after the Supreme Court’s ruling.
What Happens Next for Lenders
The court has allowed lenders to:
- Start fresh arbitration proceedings
- Exclude the time spent in earlier arbitration for limitation purposes
However, lenders must now:
- Follow a legally compliant arbitrator appointment process
- Ensure borrower participation
- Avoid one-sided clauses that risk invalidation
A Turning Point in Loan Recovery Law
The judgment marks a decisive shift away from one-sided recovery mechanisms and reinforces the principle that fairness in arbitration is not optional.
For borrowers, it is a reminder that:
An illegal process cannot create a legal debt recovery—even years later.
Also Read: Your Home Loan Interest To Remain Unchanged
