Madras High Court: In petitions filed under Section 34 of the Arbitration and Conciliation Act, 1996 praying to set aside the award dated 09-10-2005/ 10-10-2005 passed by the family elders who were chosen by parties to arbitrate the dispute and resolve the same (respondents 1 to 3) as erroneous, arbitrary and unjust, a Single Judge Bench of N.Anand Venkatesh, J. said that while arbitral awards by lay arbitrators and family elders are generally assessed for substantial correctness rather than technical precision, the principles of natural justice are non-negotiable.
In this case, the petitioner was denied a crucial opportunity to present his case, which amounted to a violation of Section 34(2)(a)(iii). The Court held that an award can be deemed in conflict with the public policy of India if it violates the principles of natural justice.
Accordingly, the Court concluded that the award was liable to be set aside.
Background
The parties entered into an arbitration agreement on 10-05-2005, agreeing to refer all disputes relating to five companies/entities to three family elders (uncles) for resolution and final decision. Clause 5 of the agreement prescribed the procedure for conducting the proceedings, and it was mutually agreed that the arbitral award would be final and binding on both sides.
The petitioner and respondent 4 were brothers who had jointly constituted four companies along with a Hindu Undivided Family (‘HUF’), for which respondent 4 acted as the Kartha.
Disputes arose between the brothers concerning the management and financial affairs of the companies, which had been under the control of respondent 4 and his family from 1993 to 2005. The petitioner alleged that there were arbitrary debit and credit entries, large borrowings, and excessive expenses reflected in the books of accounts during that period. Consequently, the parties sought the arbitrators’ intervention to review the accounts year-wise, consider earlier court proceedings, quantify expenses, verify investments and creditors, and rectify discrepancies to ensure effective management and profitability of the companies.
From the claim statement filed by the petitioner, it appeared that, given the status of the arbitrators as family elders, there existed a moral understanding between the parties concerning their respective personal expenses and lifestyles, which were separate from the joint business affairs and had been followed over the years.
The subject matter of challenge in the petitions was the arbitral award dated passed by the family elders, who had been chosen by the parties to arbitrate and resolve their disputes.
The principal contention raised by the petitioner was that he had not been given sufficient opportunity by the Arbitral Tribunal, thereby resulting in a violation of the principles of natural justice. He further contended that the award was unreasoned and non-speaking, as it lacked proper justification and failed to address specific objections raised by him. It was also argued that the Tribunal had presumed the correctness of unaudited financial statements, which formed the basis of its conclusions, rendering the award unintelligible and inadequate.
Analysis and Decision
The Court observed that, in the present case, the Arbitral Tribunal could not be viewed from a purely commercial perspective since the three arbitrators were family elders and laypersons, not professional arbitrators. The parties had approached them out of mutual trust and respect, seeking a family-based resolution. The arbitrators were, in fact, the uncles of both the petitioner and respondent 4.
The Court, taking note of State Industries Promotion Corporation of Tamil Nadu Ltd. v. RPP Infra Projects Ltd.1, observed that it had previously dealt with the manner in which an award passed by a lay person must be construed under Section 34 of the Arbitration and Conciliation Act. In the said order, it was held that where an award was passed by a lay person, the Court should not expect the reasoning or quality of analysis to match that of a legally trained mind. Such awards were to be assessed by examining the reasons assigned and determining whether the conclusion represented a possible view based on the evidence relied upon by the arbitrators. The Court was required only to ensure that the determination was substantially correct, even if the reasoning did not meet the standard expected of professional legal reasoning.
The Court noted that, in the present case, the arbitrators were not only lay persons but also family elders who did not perceive the parties as adversaries but as members of their own family. Their primary objective was to find a solution to the dispute. Accordingly, the Court held that while examining the award, it needed only to determine whether the Arbitral Tribunal had applied its mind and reached a conclusion that would serve the best interests of the family. Interference would be warranted only in cases of absolute perversity or manifest illegality, and the normal commercial standards could not be applied.
The Court reviewed the award along with various communications between the parties and the arbitrators. It observed that the proceedings were conducted in an informal, family-like manner, with the elders hearing the parties and attempting to resolve their differences amicably.
On perusal of the award, the Court found that both parties had submitted documents and audited balance sheets of one company up to the financial year ending 31-03-2003. The arbitrators noted that both parties held equal 50% shareholding in these two companies, which was not disputed by either side.
The Court noted that for the other two companies as well as the HUF, audited accounts were not available, and only trial balance statements were submitted. The Arbitral Tribunal had also considered earlier proceedings before the Company Law Board, including examination by a Chartered Accountant of the records of companies.
The Court observed that the award was informal and non-technical, lacking issue framing, formal marking of documents, or detailed findings, and broadly attempted to resolve the family dispute. Significantly, the petitioner had repeatedly requested opportunities to explain his objections regarding accounts, through letters including a request that the award not be passed before 10-10-2005. Despite this, the Tribunal fixed hearings for 03-10-2005, which he could not attend, and passed the final award without rescheduling.
The Court held that while awards by lay arbitrators and family elders are generally to be tested for substantial correctness rather than technical precision, the principles of natural justice are non-negotiable. In this case, the petitioner was denied a crucial opportunity to present his case, resulting in a violation of Section 34(2)(a)(iii) of the Arbitration and Conciliation Act. Consequently, the Court concluded that the award required interference.
The Court concluded that an award may be held to be in conflict with the public policy of India if it is passed in violation of the principles of natural justice. In the present case, the Court found that the petitioner was not given sufficient opportunity to present his case at a crucial stage of the proceedings. This amounted to a violation of natural justice.
Accordingly, the Court held that the award was liable to be interfered with under Sections 34(2)(a)(iii) and 34(2)(b)(ii) of the Arbitration and Conciliation Act.
As a result, the Court set aside the award. The parties were permitted, if they so desired, to approach the same Arbitral Tribunal, and the lay arbitrators, being family elders, could afford both parties an opportunity to present their case and make a decision in the overall interest of the family.
[M.Maher Dadha v. S.Mohanchand Dadha, Original Petition Nos.80 of 2006 & 862 of 2007, decided on 23-10-2025]
Advocates who appeared in this case:
For Petitioner: Mr.H.Karthik Seshadri
For Respondents: Mr.Gautam S.Raman
Buy Arbitration and Conciliation Act, 1996 HERE
1. O.P. No. 494 of 2018