Date of Decision: 17th May 2023
Division Bench Of Delhi High Court
Hon’ble Mr. Justice Vibhu Bakhru
Hon’ble Mr. Justice Amit Mahajan
An arbitral award was awarded in favour of the D.H. Finance Company, the claimant before the arbitral tribunal, for a sum of Rs. 4,66,103.3/- along with interest @18%. This was brought for enforcement under Section 36 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) before the Commercial Court. The Court found that the Arbitral Award was rendered ex-parte. It also noted that the arbitrator was appointed unilaterally by D.H. Finance Company without any consent of the respondent. It further noted that the arbitrator was ineligible under Section 12(5) of the A&C Act. Therefore, the Commercial Court dismissed the enforcement application under Section 36 of the A&C Act with the cost of INR 25,000/-. This was appealed before the High Court of Delhi in the present suit.
The High Court of Delhi first looked into the question of whether a person ineligible under Section 12(5) of the A&C Act can be appointed as an arbitrator. Section 12(5) reads as:
“(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:”
Then, the Delhi High Court analysed precedents which have further elaborated on this section. Firstly, the Court looked at the case of TRF Ltd. v. Energo Engineering Projects Ltd., (2017) 8 SCC 377, where the Supreme Court held as follows:
“By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person.”
Secondly, the Delhi High Court looked at the case of Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd., (2020) 20 SCC 760. In this case, the Supreme Court relied on its previous judgement and held that the Chairman/Managing Director of an involved party is not eligible to act as an arbitrator and hence, is also ineligible to appoint a third arbitrator, despite him being eligible independently. It observed as follows:
“21. …The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016).”
Thirdly, the Delhi High Court looked at its own previous case of Proddatur Cable TV Digi Services v. Siti Cable Network Ltd., (2020) 267 DLT 51, where it noted that one party to an arbitration is not permitted to unilaterally appoint an arbitrator without the consent of the other party. It held as follows:
“Insofar as the reliance by the respondent on the judgments permitting unilateral appointment by the Authority designate of one party to the agreement is concerned, in my view, the same will have no relevance in view of the judgment of the Supreme Court in the case of Perkins (supra).”
The appellant was not seriously disputing the fact that the arbitrator was appointed unilaterally and was ineligible to be appointed as an arbitrator under Section 12(5) of the A&C Act. Their main contention was assailing the decision of the Commercial Court to award costs. They also contended that the respondent was aware of the arbitrator’s appointment and that they had not raised any objection to this appointment. Hence, through implied action, the appellant contended that the respondent is precluded from challenging the arbitral award on the grounds that the arbitrator was ineligible.
The Delhi High Court referred to the proviso to Section 12(5) of the A&C Act. This reads as:
“Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”
According to this, a party can waive off their right to object to the disqualification of an arbitrator under Section 12(5) of the A&C Act, under two conditions. Firstly, the waiver must be explicitly agreed upon in writing, and secondly, this agreement must be made after the disputes have emerged. If both of these conditions are not satisfied, it is not possible to waive the disqualification of an arbitrator. Moreover, the Delhi High Court also observed that this waiver cannot be inferred by the conduct of the party. It has to be in writing (Bharat Broadband Network Limited v. United Telecoms Ltd., (2019) 5 SCC 755). Therefore, the Delhi High Court pronounced that the failure of the respondent to object to the unilateral appointment of an ineligible arbitrator does not waive their right under Section 12(5) of the A&C Act.
The Delhi High Court goes on to the question of whether an award rendered by an arbitrator not eligible to be appointed can be enforced. The Delhi High Court relied on the Supreme Court judgement of HRD Corporation v. GAIL (India) Ltd.: (2018) 12 SCC 471 where it was held that ineligibility of arbitrator goes to the root of the appointment. Once an arbitrator becomes ineligible, then under Section 14(1)(a), he becomes de jure unable to perform his functions. Such a person would lack the inherent jurisdiction to proceed any further in the arbitration. The Supreme Court held as follows:
“Since ineligibility goes to the root of the appointment, Section 12(5) read with the Seventh Schedule makes it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes “ineligible” to act as arbitrator. Once he becomes ineligible, it is clear that, under Section 14(1)(a), he then becomes de jure unable to perform his functions inasmuch as, in law, he is regarded as “ineligible”. In order to determine whether an arbitrator is de jure unable to perform his functions, it is not necessary to go to the Arbitral Tribunal under Section 13. Since such a person would lack inherent jurisdiction to proceed any further, an application may be filed under Section 14(2) to the Court to decide on the termination of his/her mandate on this ground.”
The Delhi High Court also refers to its judgement of Govind Singh v. M/S Satya Group Pvt Ltd & Anr.: 2023/DHC/000081. In this judgement, it was held by the Delhi High Court that a decisions rendered by a person ineligible to act as an arbitrator cannot be considered as an arbitral award. It lacks the inherent jurisdiction and hence, has to be set aside wholly. It observed as follows:
“In view of the above, the remaining question to be addressed is whether an arbitral award rendered by a person who is ineligible to act as an arbitrator is valid or binding on the parties. Clearly, the answer must be in the negative. The arbitral award rendered by a person who is ineligible to act as an arbitrator cannot be considered as an arbitral award. The ineligibility of the arbitrator goes to the root of his jurisdiction. Plainly an arbitral award rendered by the arbitral tribunal which lacks the inherent jurisdiction cannot be considered as valid. In the aforesaid view, the impugned award is liable to be set aside as being wholly without jurisdiction.”
Therefore, the Delhi High Court in the present case also followed suit and held that an arbitral award passed by an ineligible arbitrator who lacks the inherent jurisdiction cannot be considered valid. In doing so, it upheld the judgement of the Commercial Court dismissing the enforcement application. This judgement holds importance for further shedding light on the question of enforceability of arbitral awards passed by persons not eligible to be arbitrators. Adding on to the previous precedents, this judgement also extended the principle of unilateral appointment of arbitrators to be invalid and void even in cases of ex-parte proceeding before the arbitral tribunal. This furthers solidifies the growing stance of the Indian judiciary in targeting the latent bias in arbitration proceedings and upholding the normative and principled underpinnings of party autonomy, impartiality and independence within the A&C Act.
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