Madras High Court
M/S.Prime Store vs Sugam Vanijya Holdings Private ... on 20 April, 2023
Arb.O.P.(Com.Div.) Nos.257 of 2021
and Arb.O.P(Com.Div).No.209 of 2022
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATE: 20.04.2023
CORAM
THE HON'BLE Mr. JUSTICE KRISHNAN RAMASAMY
Arb.O.P (Com.Div.) No.257 of 2021
and Arb.O.P(Com.Div).No.209 of 2022
A.Nos.3867 of 2021, 721 and 1908 of 2022 &
EP SR No.97542 of 2021
1.M/s.Prime Store,
Represented by its Partner, Mr.S.Kaarthi,
No.77, New Market Street,
Tiruppur – 641 604.
2.S.Kaarthi
3.Padma Sivalingam
4.Shruthi Kaarthi ... Petitioners
in Arb.O.P(Com.Div).No.257 of 2021
1.M/s.SCM Silks Private Limited,
Rep. by its Director, Mr.K.Sivalingam,
No.77, New Marker Street,
Tiruppur – 641 604.
2.K.Sivalingam ... Petitioners
in Arb.O.P(Com.Div).No.209 of 2022
versus
1/69
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Arb.O.P.(Com.Div.) Nos.257 of 2021
and Arb.O.P(Com.Div).No.209 of 2022
1.Sugam Vanijya Holdings Private Limited,
Plot No.11B, Sy No.40/9,
Devasandra Industrial Area,
2nd Stage, K.R.Puram,
Hobli, Bangalore – 560 048.
2.K.Sivalingam
3.M/s.SCM Silks Private Limited,
No.77, New Marker Street,
Tiruppur – 641 604. ... Respondent
in Arb.O.P(Com.Div).No.257 of 2021
1.Sugam Vanijya Holdings Private Limited,
Plot No.11B, Sy No.40/9,
Devasandra Industrial Area,
2nd Stage, K.R.Puram,
Hobli, Bangalore – 560 048.
2.M/s.Prime Store,
Represented by its Partner, Mr.S.Kaarthi,
No.77, New Market Street,
Tiruppur – 641 604.
3.S.Kaarthi
4.Padma Sivalingam
5.Shruthi Kaarthi. ... Respondent
in Arb.O.P(Com.Div).No.257 of 2021
https://www.mhc.tn.gov.in/judis
Arb.O.P.(Com.Div.) Nos.257 of 2021
and Arb.O.P(Com.Div).No.209 of 2022
Common Prayer: Arbitration Original Petition filed under Section
34(2)(b)(ii) and 2-A of the Arbitration and Conciliation Act, 1996, to set
aside the arbitral award dated 22.03.2021.
For Petitioners
in both Arb.O.Ps : Mr.Anirudh Krishnan
For Respondents
in both Arb.O.Ps : Mr.P.S.Raman, Senior Counsel
for Mr.P.J.Rishikesh for R1
RR2to 4 – No appearance in
Arb OP No.257 of 2021
COMMON ORDER
These Arbitration Original Petitions have been filed by the
petitioners, seeking to set aside the arbitral award dated 22.03.2021 passed
in common, by the learned sole Arbitrator.
2. The facts in brief, necessary for disposal of the present petitions,
can be stated as under:
2.1. The 1st petitioner is a partnership concern, engaged in the
business of operating and running retail textile outlets in Tamil Nadu,
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and Arb.O.P(Com.Div).No.209 of 2022
popularly known as 'The Chennai Silks'. The petitioners 2 to 4 are the
partners of the 1st petitioner's concern. The 1st respondent is a company
engaged in the business of developing and operating commercial projects
and shopping malls. The respondents 2 and 3 retired from the 1 st petitioner's
firm by executing a Partnership Release Deeds dated 11.09.2019 and
30.09.2020 respectively.
2.2. According to the petitioners, the 1st respondent during its course
of business decided to develop a Mall viz., 'VR – Chennai' at Anna Nagar,
Chennai. The 1st petitioner also intended to run the e-commerce store and
therefore, approached the 1st respondent to take on lease the space with a
carpet area of 34,434 sq.ft, in the mall 'VR Chennai'. The construction of the
Mall was completed on 20.04.2018. Thereafter, the parties herein entered
into a deed of lease dated 12.09.2018 registered as Doc.No.3779 of 2018, in
the Sub-Registrar Office, Anna Nagar. Subsequently, an Addendum to the
Lease Deed was executed between the parties on 25.09.2018, wherein
certain changes were brought into the terms and conditions of the deed of
lease dated 12.09.2018.
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2.3. The demised premises were handed over on 05.09.2018, vide
possession notice and the lease was to subsist for a period of nine years with
a lock-in period of 36 months i.e from 30.11.2018 to 30.11.2021. However,
the petitioners terminated the lease deed due to unforeseen circumstances
and claimed for refund of interest free refundable security deposit of
Rs.75,75,480/- from the 1st respondent. In reply to the said termination, the
1st respondent claimed a sum of Rs.11,88,16,397/- towards the rent for the
lock-in period and fit out expenses refuting the claim of the petitioners,
which led to the invocation of Clause 17.7 (b) of the lease deed that
provides for resolution of disputes through Arbitration. The 1st respondent
on 23.01.2019 without obtaining consent of the petitioners, unilaterally
appointed the Sole Arbitrator to adjudicate the disputes inter se the parties.
Consequently, the Sole arbitrator, vide its letter dated 07.02.2019, sent a
communication to the parties fixing a date for preliminary hearing. The 1 st
respondent filed a statement of claim and raised total of 5 claims and the
petitioners filed their counter statement raising a counter claim. The Sole
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Arbitrator passed the impugned award dated 22.03.2021 by partly allowing
the claims in favour of the 1st respondent and rejected the counter claim of
the petitioners. Aggrieved by the same, the petitioners have come forward
with the present petition.
3. The case of the respondents are as follows:
3.1. The 1st respondent/claimant-VR Mall gave a space for lease for
a period of 9 years within the mall to the petitioners-Chennai silks to an
extent of 34,434 sq.ft. through a lease deed dated 12.09.2018, registered as
Doc.No.2779/2018 and an addendum was also added to the lease deed on
25.09.2018. But the actual possession was handed over on 02.08.2018. The
commencement date is 120 days from the date of signing of the lease deed,
the lock in period was 36 months, the rent to be paid per month was
Rs.25,25,160/-. During the said period of 120 days, the petitioners-Chennai
silks have to do their fit-outs and their interiors, where this 120 days was a
rent-free period. Unfortunately, neither did petitioners-Chennai silks take
the possession nor did they use the 120 days rent-free period to complete
their interiors. But after the completion of 120 days, through an e-mail dated
12.12.2018, the petitioners-Chennai silks informed the respondents-VR
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Mall that they would like to commence their fit-outs from 14.12.2018.
Subsequently, the petitioners-Chennai silks without issuing prior notice
unilaterally terminated the lease deed vide e-mail dated 14.12.2018 stating
the only reason that due to unforeseen and unavoidable circumstances. Then
the respondents-VR Mall sent a response e-mail dated 15.12.2018 and
sought for 100% rent for the lock-in period and 50% of CAM charges as per
Clause 4.3 of the lease deed. However, petitioners- Chennai silks failed to
honor the clauses of the contract and hence dispute arose and a retired judge
of this Hon'ble Court was appointed as a Sole Arbitrator to adjudicate the
disputes between the parties and claimed the same by a letter dated
23.01.2019. The Learned Sole Arbitrator sent a letter dated 07.02.2019
fixing preliminary date of hearing of the Arbitration proceedings. The
respondents-VR Mall raised two claims before the Arbitrator one is
wrongful termination of lease deed and other is compensation to be paid as
per the terms of the contract. The Statement of Claim were filed by the
Respondents on 09.04.2019. The petitioners-Chennai silks participated in
the Arbitration proceedings and did not whisper and object the appointment
made. They filed their counter on 15.07.2019 and also filed a joint memo
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u/s.29A, but at no point in time, raised any objections. During the
Arbitration proceedings the respondents-VR Mall also filed application
under Section 17 to cancel the registered lease deed and the same was
allowed and cancelled the lease deed on 12.11.2019. The petitioners-
Chennai silks also attempted to improve their case before the learned
Arbitrator by stating the termination was due to frustration of contract as
respondents-VR Mall did not have a water connection and necessary
approvals. But the respondent proved that the petitioners-Chennai silks
terminated the contract for their convenience and also did not adhere to the
Clauses in the Lease Deed. The learned Arbitrator, after considering all the
evidences and decided that the termination made by the petitioners-Chennai
silks was invalid, ultimately, awarded the compensation to respondents-VR
Mall for a sum of Rs.11,88,16,397/- with interest @24% p.a. with cost
through an award dated 22.03.2021. Therefore, according to the
respondents, the learned Arbitrator has dealt with the claim of the
respondents and counter claim made by the petitioners in proper perspective
and passed the award, which requires no interference.
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4. Learned counsel appearing for the petitioner would submit that the
appointment of the Sole Arbitrator is arbitrary and unlawful and the Sole
Arbitrator ought to have recused from proceedings in the arbitration since
he is de jure ineligible to act as an Arbitrator. Section 34 of the Act
contemplates that an award is liable to be set aside if it is against the public
policy of India and violates basic notions of justice and the present award is
passed in violation of basic notions of justice since the learned Sole
Arbitrator ignored the settled principles of law in relation to unilateral
appointment. He pointed out that it is settled law that the damages cannot be
granted in contemplation of future loss, while so, the Sole Arbitrator had
granted rent and 50% of CAM charges for 36 months without analyzing the
fact that the 36 months' period ends only on 30.11.2021, which would
establish that the 1st respondent did not incur any loss till the month of
November 2021. Further, there is no evidence produced before the Sole
Arbitrator to show that the 1st respondent had taken mitigation measures to
reduce the alleged losses. He would also contend that instant case falls foul
of Section 12(5) of the Act since the arbitral Tribunal was constituted in
violation of Section 12(5) r/w Schedule VII of the Act and further, there was
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no waiver of right in writing by the petitioners and it is evident in
preliminary hearing dated 27.02.2019, wherein, no express waiver was
recorded by the learned Arbitrator. He would also contend that challenge to
unilateral appointment can be challenged even at the stage of Section 34
proceedings since unilateral appointment goes to the root of the jurisdiction
and the sole Arbitrator in the present case virtually lacks of jurisdiction in
terms of Section 12(5) r/w Schedule VII of the Act.
5. The learned counsel for the petitioners would also contend that the
1st respondent has not produced any evidence to prove the losses, but the
sole Arbitrator, has erroneously put the burden on the petitioners to prove
that no loss was sustained by the 1st respondent and passed the award merely
based on the claim statement submitted by the 1st respondent even though no
evidence was adduced in regard to the losses incurred by them and no steps
were taken to mitigate the losses. It is also submitted that the learned
Arbitrator, without proper appreciation of evidence available on record, has
awarded the claim of the 1st respondent with exorbitant rate of interest at
24% p.a. while rejecting the counter claim of the petitioner for refund of
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interest free security deposit. Therefore, with these contentions, the learned
counsel sought for setting aside the award passed by the learned Arbitrator.
6. Apart from raising various grounds to challenge the award, the
learned counsel for the petitioners would attack the impugned award
primarily on the ground of unilateral appointment of the Arbitator. He
would vehemently contend that though the Arbitration Clause 17.7(b) of the
Deed of Lease enables the respondents to appoint a sole Arbitrator, the
respondents ought to have made the appointment of the Arbitrator strictly in
terms of Section 12(5) of the Act which would not draw adverse and
arbitrariness in the arbitral proceedings. He would also contend that a
unilaterally appointed Arbitrator is de jure ineligible to act as an Arbitrator
in terms of Section 12 r/w Schedule VII of the Act. In this regard, he relied
upon the decisions of the Hon'ble Supreme Court reported in 2019 SCC
Online SC 1516 (Perkins Eastman Architects DPC & Another versus
HSCC (India) Ltd.) and (2019) 5 SCC 755 (Bharat Broadband Network
Limited versus United Telecoms Limited).
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7. The learned counsel also would contend that though the petitioners
participated in the proceedings and filed a joint memo under Section 29A
seeking to extend the time-line, would not by itself construe that the
petitioners have waived off their right to object the unilateral appointment.
He pointed out that mere filing a memo under Section 29A may perhaps
amount to waiver under Section 4, but certainly not 'express waiver' under
Section 12(5) Act. In this regard, the learned counsel relied upon a decision
reported in "JMC Projects (India) Ltd., versus Indure Private Limited"
reported in 2020 SCC Online Delhi 1950. Further, the learned counsel
would contend that even participation in the arbitral proceedings, shall not
bar the petitioners to challenge the unilateral appointment under Section 34
r/w 12(5) of the Act. In this regard, he relied upon a decision reported in
"Hina Suneet Sharma & another Versus M/s.Nissan Renault Financial
Services India Pvt.Ltd." vide order dated 15.02.2023 in
Arb.O.P.(Com.Div.) No.159 of 2022 passed by this Court.
8. The learned counsel would further contend that challenge to
unilateral appointment can be raised at any stage and even at the stage of
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setting aside of the award also since the unilateral appointment goes to the
root of the jurisdiction. If the appointment of an Arbitrator is made in
violation of Section 12(5) r/w VII Schedule of the Act, he/she becomes de
jure ineligible to act as an Arbitrator and lacks inherent jurisdiction.
Therefore, he would contend that the challenge to inherent lack of
jurisdiction can be raised at any stage including at the stage of setting aside
of the award. According to the learned counsel for the petitioners, since the
respondent made the appointment of the Arbitrator unilaterally in violation
of Section 12(5) r/w VII Schedule of the Act, the petitioners have rightly
challenged the same while challenging the award in the present proceedings.
Therefore, the learned for the petitioners prayed this Court to set aside the
arbitral award as prayed for.
9. On the other hand, the learned Senior counsel Mr.P.S.Raman
appearing for the respondents would submit that the petitioner-Chennai
silks mainly contends that VR Mall hasn't incurred any losses and produced
any evidence to show such losses but they claimed Rs.11,26,16,397/-and
Rs.62,00,000/- in the award which was granted by the Learned Arbitrator
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are huge, but it is pertinent to note that the clause 14.3(b) of the lease deed
provides that if the petitioner terminates the lease deed before the expiry of
the lock-in period, it requires prior notice of 6 months and 100% of the rent
for remaining term to be paid and clause 4 of the addendum also provides
for 50% of the CAM charges rent for the remaining term to be paid as well.
Therefore, in the award it is very clear that it is not the loss incurred by the
respondents but it is the recovery of admitted liability for Claim worth
Rs.11,26,16,397/-for full space/showroom made ready exclusively for
Chennai silks. Concerning the claim worth of Rs.62,00,000/- awarded, VR
Mall has incurred expenditure for dismantling the existing RCC structure
and other works done for the purpose of suiting the needs of the petitioner-
Chennai silks which required restoration of the structure to original design
for the future tenants, the records regarding were filed as Ex.C-15-C18 to
show the expense incurred. Therefore the loss incurred has been justified
with appropriate evidences.
10. Further the learned Senior counsel for the respondent justifies the
claim and grant of interest @ 24% for the claim is appropriate. The Learned
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Arbitrator awarded only after considering that transaction between the
petitioners and respondents is of commercial nature. Where the deed also
provides a clause 5.4(a) for "Late Charges- that in event of payment of any
sum of money due under the lease deed, including but not limited to rent,
taxes and other charges becomes overdue beyond the date on which the said
payments are due and payable in terms of deed, the Lessee shall be under
obligation to pay interest on the amount due and payable at 24%". The
learned counsel for the respondents also contends that it is false to state that
the award passed by the Learned Arbitrator ignores vital evidence. As to
Security deposit, clause 14.5b says that in the event of illegal/ wrongful
termination by petitioner-Chennai silks the respondent-VR Mall is entitled
to forfeit the security deposit.
11. The learned Senior counsel for the respondents would also
contend that at no point of time, the petitioners never raised any objection as
regards the unilateral appointment of the learned Arbitrator, but they
completely participated in the arbitral proceedings and further, they filed a
joint memo, agreeing for extension of the mandate of the learned Arbitrator,
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by which, the petitioners have virtually waived off their right to object the
appointment of the Arbitrator. He would also point out that if at all the
petitioners were aggrieved by the appointment of the Arbitrator, they ought
to have raised objections prior to the first arbitration hearing, but all along
till the award passed by the learned Arbitrator, the petitioners have not
raised any objections. He would also point out that in this matter, a retired
Hon'ble Judge of this Court was appointed and hence, the plea of bias can
never be attributed.
12. The learned Senior counsel for the respondents would submit that
the unilateral appointment in the present case is not at all wrong and the
learned Arbitrator does not lack jurisdiction, as the learned Arbitrator
appointed was a retired High Court Judge of this Hon'ble Court, so none of
the Clauses under VII schedule of the Act are attracted and hence there is no
applicability of Section 12(5) of the Act. He would also contend that
'express waiver' is not required in the present case inasmuch as the
petitioners have completely participated in the proceedings and did not raise
a whisper about the appointment and has acquiesced with such appointment
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made. He pointed out that when the said learned Arbitrator accepted the
appointment through a letter, to which the petitioners never raised any
objections at that time, which demonstrates that the petitioners expressly
waived off their right to object. In this regard, he referred the judgment of
the Calcutta High Court in “McLeod Russel India Ltd. v. Aditya Birla
Finance Ltd., in Arb.Petn.No.106 of 2020, dated 14.02.2023, wherein the
Court observed that the pleadings filed by the petitioners before the
Arbitrator would constitute an express agreement as required under the
proviso to S.12(5) of the Act and the exchange of statement of claim and
statement of defence/affidavit by the parties, fulfills the requirement of
S.7(2)(e) of the Act which provided that the existence of an arbitration
agreement in case it is alleged by one party and not denied by the other by
way of exchange of statements of claim and defence.
13. The learned counsel would submit that as regards the express
waiver, the judgment which was relied upon by the petitioners in the case of
“Hina Suneet Sharma & Anr. v. M/s. Nissan Renault Financial Services
India Pvt.Ltd., in Arb.O.P.No.159 of 2022, dated 15.02.2023 is concerned,
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the facts and circumstances are different and will not apply to the present
facts and circumstances of the case. He also contends that this judgment
hasn't considered the decision of the Hon'ble Division Bench of Madras
High Court in “General Manager, CORE, Allahabad v. JV Engineering
Associates” in OSA. No. 119 of 2021 dated 11.08.2021, which held that
waiver u/S.12(5) of the Act can also be inferred from the correspondences.
In the present case, relying on the Hon'ble Division Bench in General
Manager, CORE, Allahabad v. JV Engineering Associates, the joint memo
dated December, 2020 filed by both the petitioners and the respondents for
the extension of time till May, 2021 is sufficient to constitute “the express
waiver in writing”.
14. The learned counsel also contends that Sec.12 of the Act is
specific to the mandate of the Arbitrator while section 4 of the Act is
omnibus in nature. Hence, the waiver in this case would be covered under
section 4 of the Act which says waiver need not to be 'express'. Where mere
participation and failure to object itself would constitute a waiver. In this
regard, he referred the following case laws, viz.,
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i. Quippo Constructions v. Janardan Nirman Pvt. Ltd., 2020
SCC OnLine SC 419:: 2020 (3) Arb LR 75 - The Supreme Court after
considering Section 4 of the Act, held as follows:
"31. … Considering the facts that the respondent failed
to participate in the proceedings before the Arbitrator and did
not raise any submission that the Arbitrator did not have
jurisdiction or that he was exceeding the scope of his authority,
the respondent must be deemed to have waived all such
objections".
ii. “State Bank of India v. Ram Das”, (2003) 12 SCC 474, wherein,
it has been held as under:
"It is an established view of law that where a party
despite knowledge of the defect in the jurisdiction or bias or
malice of an arbitrator participated in the proceedings without
any kind of objection, by his conduct it dis entitles itself from
raising such a question in the subsequent proceedings''.
iii. “BSNL v. Motorola India (P) Ltd” reported in (2009) 2 SCC
337, wherein, after considering S 4 of the Act, at Para 39, it has been held
by the Hon'ble Supreme Court as follows:
"39.Pursuant to Section 4 of the Arbitration and
Conciliation Act, 1996, a party which knows that a
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requirement under the arbitration agreement has not been
complied with and still proceeds with the arbitration without
raising an objection, as soon as possible, waives their right to
object. The High Court had appointed an arbitrator in
response to the petition filed by the appellants (sic
respondent). At this point, the matter was closed unless further
objections were to be raised. If further objections were to be
made after this order, they should have been made prior to the
first arbitration hearing. But the appellants had not raised any
such objections. The appellants therefore had clearly failed to
meet the stated requirement to object to arbitration without
delay. As such their right to object is deemed to be waived."
iv. Union of India v. Pam Development (P) Ltd., reported in (2014)
11 SCC 366, the Honble Supreme Court, after considering Section 4 of the
Act, has held in para 16 as follows:
“16. As noticed above, the appellant not only filed the
statement of defence but also raised a counterclaim against
the respondent. Since the appellant has not raised the
objection with regard to the competence/jurisdiction of the
Arbitral Tribunal before the learned arbitrator, the same is
deemed to have been waived in view of the provisions
contained in Section 4 read with Section 16 of the Arbitration
Act, 1996".
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v. “ASM Shipping Ltd of India v TTMI Ltd of England, Queen
Bench Division” reported in [2005] EWHC 2238, wherein, after
considering the scope of Waiver, at Para (49], it has been held as under:
''In my judgment, by taking up the award, at the very
least, the owners had lost any right they may have had to
object to X QC's continued involvement in that part of the
arbitral process. It is unacceptable to write making further
objections after the hearing was concluded. X QC's had made
his decision not to recuse himself, rightly or wrongly, at the
beginning of the third day. Owners were faced with a straight
choice: come to the court and complain and seek his removal
as a decision-maker or let the matter drop. They could not get
themselves into a position whereby if the award was in their
favour they would drop their objection but make it in the event
that the award went against them. A 'heads we win and tails
you lose' position is not permissible in law as s 73 makes
clear. The threat of objection cannot be held over the head of
the Tribunal until they make their decision and could be seen
as an attempt to put unfair and undue pressure upon them. ".
15. Finally, he also contends that the judgment in Perkins case will
not apply to the present case as it deals with unilateral appointment at the
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stage of invocation/appointment and not under Section 34 of the Act to set
aside the award. In the present case, the arbitration was invoked on
23.01.2019 and the Arbitral Tribunal was constituted on 07.02.2019. The
judgment in the Perkins' case was delivered on 26.11.2019. Assuming that
the law laid down by the Perkins was to apply only from the date of the said
judgment, the petitioner in the present case never raised any objection and
in fact a joint memo was filed agreeing for the extension of the mandate in
December, 2020. Consequently, such an act would constitute waiver. He
further contends that in the present case both are private parties and the
learned Sole Arbitrator was a Retired High Court Judge and the question of
bias will never rise at all.
16. Therefore, the learned counsel for the respondents conclude that
the learned Arbitrator vide his award dated 22.03.2021 has rightly awarded
a sum of Rs.11,88,16,397/- with interest 24% and costs of Rs.5,00,000/-
which requires no interference.
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17. Keeping in mind the provisions of law and the relevant case laws
relied on by the parties and the arguments advanced by the learned counsel
for the parties, this Court is inclined to deal with the issue as regards the
validity of the unilateral appointment of the learned Sole Arbitrator without
providing express agreement in writing by the petitioners in terms of
proviso of Section 12(5) of the Act.
18. Arbitration is a method of alternate dispute resolution wherein a
third party is appointed for adjudication of disputes between the concerned
parties. Therefore, the Arbitrator(s) are also commonly known as creatures
of a contract. As arbitration requires adjudication on rights of the parties
involved, principles of natural justice play a critical role in avoiding any
potential risk of miscarriage of justice.
19. The first principle of natural justice is ‘nemo judex in causa sua’,
which means ‘no man can be a judge in his own cause’. This principle
intends to avoid any ‘reasonable apprehension of bias’ that may arise during
any judicial process. Section 12 of the Arbitration and Conciliation Act,
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1996 lays down provisions for the appointment of an Arbitrator and
conditions where the appointment may be valid or invalid.
20. Prior to the Arbitration and Conciliation (Amendment) Act, 2015,
unilateral appointments were allowed in India without any restrictions.
However, time and again, unilateral appointment is becoming controversial
because it does not take into account the wishes of the other party as to the
sole arbitrator or arbitral tribunal, which leads to an apprehension of bias
and in order to avoid justifiable doubts and to promote the neutrality of
arbitrators to maintain the independence and impartiality of the arbitral
process, the Arbitration and Conciliation (Amendment) Act, 2015 ["2015
Amendment Act"] came to be enacted, which widened the grounds of
challenging the composition of the arbitral Tribunal under Section 12,
providing that the appointment of person as an arbitrator may be
challenged if they fail to make necessary disclosures when approached in
connection to their appointment as an arbitrator and stating one‘s relation
with any of the parties in relation to the subject matter must be disclosed,
irrespective of the nature of such relationship.
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21. Section 12(5) of the Arbitration and Conciliation Act, 1996 was
amended to incorporate two separate schedules into the Act. The newly
incorporated Fifth Schedule provides for factors as to whether there are
circumstances which give rise to justifiable suspicions ‘as to an arbitrator’s
independence or impartiality,’ and Seventh Schedule sets out the
‘categories of individuals ineligible to be nominated as arbitrators.
22. The grounds enumerated under the Fifth and Seventh Schedules
to the Act enlist the circumstances that could raise a justifiable doubt about
the independence and impartiality of an arbitrator and/or de jure disqualify
him from being appointed as an arbitrator.
23. Coming to the case on hand, before dealing with the above issue,
it is relevant to extract the arbitration Clause contained in the Lease Deed
entered into by the parties, which reads as under:
“17.7 (b) of the Deed of Lease:
If any question of difference or claim or dispute shall arise
between the parties herein touching these presents or the
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construction thereof to rights, duties or obligations of the
parties hereto or as to any matter arising out of or
connected with the subject matter of these presents, the
same shall be referred to the arbitration in accordance with
the provisions of the Arbitration and Conciliation Act,
1996 and amendments. The seat of arbitration shall be
Chennai. The reference shall be to a Sole Arbitrator to
be appointed by the Lessor. The arbitrator shall render the
award in English language and in writing. The Parties agree
to abide by the decision of the arbitrator, which shall be
final and binding."
24. It appears that the respondents, invoking the above Clause, by
letter dated 23.01.2019, nominated Shri Justice A.Ramamoorthy (Retd.)
Judge of this Court as a Sole Arbitrator to adjudicate the dispute between
the parties. Therefore, it is not in dispute that the appointment of the
Arbitrator is unilateral at the instance of the respondents.
25. It is pertinent to note here that as on this date, the respondents
invoking the arbitral clause and appointing the Sole Arbitrator, the law as
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regards unilateral appointment of Arbitrator has been well settled. In order
to provide for “neutrality of arbitrators” and rule against bias, sub-section
(5) of Section 12 (as inserted by 2015 Amendment) provided that
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, he shall
be ineligible to be appointed as an arbitrator. Further, in the case of “TRF
Ltd. v. Energo Engineering Projects Ltd., reported in (2017) 8 SCC 377,
the Supreme Court dealt with the question of as to whether an individual
who has become ineligible by law under Section 12(5) of the Act to be the
arbitrator be able to appoint another individual in his place. The Court held
that once a person becomes ineligible by law to be the arbitrator he/she
cannot nominate another person to be the arbitrator and observed in para 57
as under:
“57. In such a context, the fulcrum of the controversy would be,
can an ineligible arbitrator, like the Managing Director, nominate an
arbitrator, who may be otherwise eligible and a respectable person. As
stated earlier, we are neither concerned with the objectivity nor the
individual respectability. We are only concerned with the authority or
the power of the Managing Director. By our analysis, we are obligated
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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. Needless to say, once the
infrastructure collapses, the superstructure is bound to collapse. One
cannot have a building without the plinth. Or to put it differently, once
the identity of the Managing Director as the sole arbitrator is lost, the
power to nominate someone else as an arbitrator is obliterated.
Therefore, the view expressed by the High Court is not sustainable and
we say so.” (Emphasis added)
26. In the above said judgment, the Hon'ble Supreme Court relied on
its decision in the case of “Walter Bau AG v Municipal Corporation of
Greater Mumbai” reported in (2015) 3 SCC 800, wherein the Hon'ble
Court observed that “Unless the appointment of the arbitrator is ex facie
valid and such appointment satisfies the Court exercising jurisdiction
under Section 11(6) of the Arbitration Act, acceptance of such appointment
as a fait accompli to debar the jurisdiction under Section 11(6) cannot be
countenanced in law”.
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27. In its landmark judgment in “Perkins Eastman Architects DPC
& Anr. v. HSCC (India) Ltd” reported in 2019 SCC Online SC 1517, the
Hon'ble Supreme Court has settled the position of unilateral appointment of
Sole arbitrators by holding that Unilateral appointment of the arbitrator
shall be vitiated by Section 12(5) of the Arbitration and Conciliation Act,
1996. It has been observed in paragraph Nos.16,17,18,20 and 21 as under:
“16. However, the point that has been urged, relying
upon the decision of this Court in Walter Bau AG and TRF
Limited , requires consideration. In the present case Clause 24
empowers the Chairman and Managing Director of the
respondent to make the appointment of a sole arbitrator and
said Clause also stipulates that no person other than a person
appointed by such Chairman and Managing Director of the
respondent would act as an arbitrator. In TRF Limited, a Bench
of three Judges of this Court, was called upon to consider
whether the appointment of an arbitrator made by the
Managing Director of the respondent therein was a valid one
and whether at that stage an application moved under Section
11(6) of the Act could be entertained by the Court. The relevant
Clause, namely, Clause 33 which provided for resolution of
disputes in that case was under:
“33. Resolution of dispute/arbitration
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(a) In case any disagreement or dispute
arises between the buyer and the seller under or
in connection with the PO, both shall make
every effort to resolve it amicably by direct
informal negotiation.
(b) If, even after 30 days from the
commencement of such informal negotiation,
seller and the buyer have not been able to
resolve the dispute amicably, either party may
require that the dispute be referred for
resolution to the formal mechanism of
arbitration.
(c) All disputes which cannot be settled
by mutual negotiation shall be referred to and
determined by arbitration as per the Arbitration
and Conciliation Act, 1996 as amended.
(d) Unless otherwise provided, any
dispute or difference between the parties in
connection with this agreement shall be referred
to sole arbitration of the Managing Director of
buyer or his nominee. Venue of arbitration shall
be Delhi, and the arbitration shall be conducted
in English language.
(e) The award of the Tribunal shall be
final and binding on both, buyer and seller.”
17. In TRF Limited , the Agreement was entered into
before the provisions of the Amending Act (Act No.3 of 2016)
came into force. It was submitted by the appellant that by
virtue of the provisions of the Amending Act and insertion of
the Fifth and Seventh Schedules in the Act, the Managing
Director of the respondent would be a person having direct
interest in the dispute and as such could not act as an
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arbitrator. The extension of the submission was that a person
who himself was disqualified and disentitled could also not
nominate any other person to act Arbitration Application
No.32 of 2019 Perkins Eastman Architects DPC & Anr. v.
HSCC (India) Ltd. 18 as an arbitrator. The submission
countered by the respondent therein was as under: -
“7.1. The submission to the effect that
since the Managing Director of the respondent
has become ineligible to act as an arbitrator
subsequent to the amendment in the Act, he
could also not have nominated any other
person as arbitrator is absolutely
unsustainable, for the Fifth and the Seventh
Schedules fundamentally guide in determining
whether circumstances exist which give rise to
justifiable doubts as to the independence and
impartiality of the arbitrator. To elaborate, if
any person whose relationship with the parties
or the counsel or the subject-matter of dispute
falls under any of the categories specified in
the Seventh Schedule, he is ineligible to be
appointed as an arbitrator but not otherwise.
18. The issue was discussed and decided by this Court
as under:-
50. First, we shall deal with Clause (d). There is
no quarrel that by virtue of Section 12(5) of the Act, if
any person who falls under any of the categories
specified in the Seventh Schedule shall be ineligible to
be appointed as the arbitrator. There is no doubt and
cannot be, for the language employed in the Seventh
Schedule, the Managing Director of the Corporation
has become ineligible by operation of law. It is the
stand of the learned Senior Counsel for the appellant
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that once the Managing Director becomes ineligible, he
also becomes ineligible to nominate. Refuting the said
stand, it is canvassed by the learned Senior Counsel for
the respondent that the ineligibility cannot extend to a
nominee if he is not from the Corporation and more so
when there is apposite and requisite disclosure. We
think it appropriate to make it clear that in the case at
hand we are neither concerned with the disclosure nor
objectivity nor impartiality nor any such other
circumstance. We are singularly concerned with the
issue, whether the Managing Director, after becoming
ineligible by operation of law, is he still eligible to
nominate an arbitrator. At the cost of repetition, we
may state that when there are two parties, one may
nominate an arbitrator and the other may appoint
another. That is altogether a different situation. If there
is a clause requiring the parties to nominate their
respective arbitrator, their authority to nominate cannot
be questioned. What really in that circumstance can be
called in question is the procedural compliance and the
eligibility of their arbitrator depending upon the norms
provided under the Act and the Schedules appended
thereto. But, here is a case where the Managing
Director is the “named sole arbitrator” and he has also
been conferred with the power to nominate one who can
be the arbitrator in his place. Thus, there is subtle
distinction. In this regard, our attention has been drawn
to a two-Judge Bench decision in State of Orissa v.
Commr. of Land Records & Settlement. In the said case,
the question arose, can the Board of Revenue revise the
order passed by its delegate. Dwelling upon the said
proposition, the Court held: (SCC p. 173, para 25)
“25. We have to note that the Commissioner
when he exercises power of the Board delegated to
him under Section 33 of the Settlement Act, 1958,
the order passed by him is to be treated as an order
of the Board of Revenue and not as that of the
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Commissioner in his capacity as Commissioner.
This position is clear from two rulings of this Court
to which we shall presently refer. The first of the
said rulings is the one decided by the Constitution
Bench of this Court in Roop Chand v. State of
Punjab. In that case, it was held by the majority
that where the State Government had, under Section
41(1) of the East Punjab Holdings (Consolidation
and Prevention of Fragmentation) Act, 1948,
delegated its appellate powers vested in it under
Section 21(4) to an “officer”, an order passed by
such an officer was an order passed by the State
Government itself and “not an order passed by any
officer under this Act” within Section 42 and was
not revisable by the State Government. It was
pointed out that for the purpose of exercise of
powers of revision by the State under Section 42 of
that Act, the order sought to be revised must be an
order passed by an officer in his own right and not
as a delegate of the State. The State Government
was, therefore, not entitled under Section 42 to call
for the records of the case which was disposed of by
an officer acting as its delegate.” (emphasis in
original)
51. Be it noted in the said case, reference was
made to Behari Kunj Sahkari Awas Samiti v. State of
U.P. , which followed the decision in Roop Chand v.
State of Punjab . It is seemly to note here that the said
principle has been followed in Indore Vikas
Pradhikaran .
52. Mr Sundaram has strongly relied on
Pratapchand Nopaji. In the said case, the three-Judge
Bench applied the maxim “qui facit per alium facit per
se”. We may profitably reproduce the passage: (SCC p.
214, para 9)
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“9. … The principle which would apply, if
the objects are struck by Section 23 of the
Contract Act, is embodied in the maxim:
“qui facit per alium facit per se” (what one
does through another is done by oneself). To
put it in another form, that which cannot be
done directly may not be done indirectly by
engaging another outside the prohibited
area to do the illegal act within the
prohibited area. It is immaterial whether,
for the doing of such an illegal act, the
agent employed is given the wider powers or
authority of the “pucca adatia”, or, as the
High Court had held, he is clothed with the
powers of an ordinary commission agent
only.”
53. The aforesaid authorities have been
commended to us to establish the proposition that if the
nomination of an arbitrator by an ineligible arbitrator
is allowed, it would tantamount to carrying on the
proceeding of arbitration by himself. According to the
learned counsel for the appellant, ineligibility strikes at
the root of his power to arbitrate or get it arbitrated
upon by a nominee.
54. In such a context, the fulcrum of the
controversy would be, can an ineligible arbitrator, like
the Managing Director, nominate an arbitrator, who
may be otherwise eligible and a respectable person. As
stated earlier, we are neither concerned with the
objectivity nor the individual respectability. We are only
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concerned with the authority or the power of the
Managing Director. 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. Needless to say, once the infrastructure
collapses, the superstructure is bound to collapse. One
cannot have a building without the plinth. Or to put it
differently, once the identity of the Managing Director
as the sole arbitrator is lost, the power to nominate
someone else as an arbitrator is obliterated. Therefore,
the view expressed by the High Court is not sustainable
and we say so.”
19..........................
20...........................
21. But, in our view that has to be the logical deduction
from TRF Limited . Paragraph 50 of the decision shows that
this Court was concerned with the issue, “whether the
Managing Director, after becoming ineligible by operation of
law, is he still eligible to nominate an Arbitrator”.The
ineligibility referred to therein, was as a result of operation of
law, in that a person having an interest in the dispute or in the
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outcome or decision thereof, must not only be ineligible to act
as an arbitrator but must also not be eligible to appoint anyone
else as an arbitrator and that such person cannot and should
not have any role in charting out any course to the dispute
resolution by having the power to appoint an arbitrator. The
next sentences in the paragraph, further show that cases where
both the parties could nominate respective arbitrators of their
choice were found to be completely a different situation. 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 Arbitration Application No.32 of
2019 Perkins Eastman Architects DPC & Anr. v. HSCC (India)
Ltd. 24 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) and recognised by the decision of this Court in TRF
Limited.”
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28. A perusal of the above judgment, it is clear that the Hon'ble Apex
Court has extended the applicability of the TRF Limited case principle and
held that interested persons to a dispute, such as a Managing Director or
Chief Executive Officer (CEO) would not only be ineligible to act as an
arbitrator but also be proscribed from appointing an arbitrator to adjudicate
the dispute.
29. Though the learned counsel for the respondents would point out
that in the present case, the arbitration clause was invoked on 23.01.2019
and the Arbitral Tribunal was constituted on 07.02.2019, i.e. much prior to
the pronouncement of above judgment in the Perkins' case as delivered on
26.11.2019, the ratio laid down will not apply to the present case, it is
significant to note that the ratio laid down in Perkin's case has been
moulded based upon the judgment in TRF case, which was delivered by the
Supreme Court on 03.07.2017. Therefore, the concept and proposition of
law laid down by the Hon'ble Apex Court in Perkin's case will squarely
apply to the facts of the present case.
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30. That apart, the law laid down by the Hon'ble Apex Court in both
TRF and Perkins cases is based on the amendment made to Section 12(5) in
the year 2015. Therefore, even though the judgment Perkins's case
delivered in the year 2019, the proposition laid down in regard to the
amended provision which came into effect from the year 2015 and hence, it
is applicable to the present case. What the law laid down by the Hon'ble
Supreme Court is by interpreting the amended provision of Section 12(5)
and though the Hon'ble Supreme Court provided the interpretation on
3.7.2017 in TRF case, the said interpretation would apply from the date of
commencement of Section 12(5) of the Act. The Hon'ble Supreme Court
has not made any observation or law which are not available under Section
12(5) of the Act, but the law laid down by the Supreme Court is within the
scope of Section 12(5).
31. Therefore, by virtue of amended provision vis-a-vis the above
mentioned judgment of the Hon'ble Supreme Court, the law is very clear to
the effect that no person whose relationship with the parties or counsel or
the subject matter of the dispute falls under any of the categories
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specified in the Seventh Schedule, shall be ineligible to be appointed as an
arbitrator and that once such person becomes ineligible by law to be the
arbitrator he/she cannot nominate another person to be the arbitrator.
32. The respondents having empowered by the arbitration Clause
17.7(b) of the agreement, appointed the Sole Arbitrator, they should aware
of the provision of law and its amendment and the relevant case laws
rendered by the Hon'ble Supreme Court in the matter of unilateral
appointment and after having nominated the Arbitrator unilaterally, they
ought to have waited for 30 days from the date of receipt of Section 21
notice by the petitioners for obtaining the consent in writing in terms of
proviso of Section 12(5). In the event of the petitioners failing to waive
their right to object the unilateral appointment of the Arbitrator by way of
express agreement in writing within 30 days from the date of receipt of
Section 21 notice, then the respondents should have approached this Court
seeking for appointment of the Arbitrator in terms of Section 11(5) & (6) of
the Act. In the present case, no such procedure has been followed. On the
other hand, the respondents proceeded with the appointment of the
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Arbitrator unilaterally against the provision of Section 12(5) of the Act and
the learned Arbitrator commenced the proceedings with his disabilities
wherein, the petitioners have also participated.
33. Now the issue that arises for consideration is as follows:
“Whether the Arbitrator nominated by the
respondents, is disqualified under Section 12(5) r/w
Seventh Schedule of the Act?
34. Admittedly, in the present case, the appointment of the Arbitrator
has been made unilaterally by the respondents and no express agreement as
contemplated under the proviso to Section 12(5) of the Act was given by
the petitioners waiving their right to object the same. It is contended on
behalf of the respondents that since they nominated a retired Judge of this
Court as Arbitrator, he is free from any disqualification and no bias can be
attributed. However, it is significant to note that Section 12(5) r/w Seventh
Schedule of the Act which deals with ineligibility of a person to be
appointed as an Arbitrator, is a mandatory and non-derogable provision of
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the Act and it would clearly described the persons who are ineligible to be
appointed as Arbitrator, i.e. as a result of them being disqualified under the
Seventh Schedule. Therefore, the disqualification under the Seventh
Schedule would be applicable to any person including the retired Judge and
this is what the law laid down by the Hon'ble Supreme Court in TRF case.
If a retired Judge acted as an Advisor or giving opinion in the matter, will
certainly comes under the category of disqualified persons category and the
Act has not provided any special privileges for a retired Judge. That being
the law enacted, the contention of the learned Senior counsel that the
learned Arbitrator who is a retired Judge is free from bias, is not acceptable.
35. A person who is disqualified from being appointed as an
Arbitrator, cannot commence the arbitral proceedings and if he commences
any such proceedings where even though both parties have participated and
ultimately any award is passed, such award is non est in law and liable to be
set aside. Conducting the arbitral proceedings and passing an award by a
disqualified person is as good as conducting the proceedings and delivering
the judgment by a Kangaroo Court where even both the parties had
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participated. Law will not recognize any judgment or order passed by
Kangaroo Court where the law and justice are disregarded or perverted and
the similar logic would apply to a disqualified person who is appointed as
an Arbitrator.
36. Absolutely there is no bar for appointing the Arbitrator
unilaterally ipso facto prior to the amended provision 12(5) of the Act.
What the Section 12(5) insists upon that in the event of unilateral
appointment, the consent of the other party should be obtained in writing.
Now the issue is at what stage such consent in writing should be obtained
from the other party? The stage, in the opinion of this Court is immediately
upon receipt of the notice by the other party who is intimated about the
appointment of Arbitrator unilaterally. Section 11(5) states that in the event
if no agreement for appointment of the Arbitrator is arrived within 30 days
from the date of request made by the party who appointed the Arbitrator,
the other party can approach the Court, seeking for appointment of
Arbitrator. Therefore, in the event of unilateral appointment, this Court is of
the considered view that the express agreement in writing in terms of
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proviso to Section 12(5) should be obtained within 30 days from the date of
receipt of notice of appointment of Arbitrator unilaterally. In case no
such consent in writing is provided by the other party for the unilateral
appointment of the Arbitrator, the recourse available for the party is to
approach this Court, seeking for appointment of the Arbitrator. Therefore,
if no such consent in writing is provided for the unilateral appointment of
the Arbitrator within 30 days, the disqualification as contemplated under
Section 12(5) r/w Seventh Schedule comes into effect on expiry of 30 days
and when once the disqualification gets attached to the Arbitrator, he cannot
perform his duties and commence the arbirtral proceedings. Despite the
same, if the proceedings are commenced, it would be non est in law. Even
if both parties participated in those proceedings since the proceedings
commenced by a disqualified person, the same are rendered in non est in
law and if any award is passed by the disqualified Arbitrator, it cannot be
sustained and liable to be set aside. In other words, when arbitral
proceedings are commenced by a disqualified person, the question of mere
participation in the arbitral proceedings by the parties cannot be considered
as a waiver. As far as the unilateral appointment of the Arbitrator is
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concerned, to waive the disqualification attached, is only by way of express
agreement in writing by the other party in terms of Section 12(5), which
should be obtained in 30 days, otherwise, it would be considered that there
is no agreement between the parties for the appointment of Arbitrator
unilaterally.
37. Section 12(5) read with the Seventh Schedule of the Act makes it
abundantly clear that if the arbitrator incurs any disqualification under the
items listed in the Seventh Schedule, he de jure becomes ineligible to act as
an arbitrator. As far as the contention raised on behalf of the respondents
that since a retired Hon'ble Judge of this Court was appointed as learned
Sole Arbitrator, the plea of bias can never be attributed and more over, none
of the clauses mentioned under Schedule VII of the Act are attracted to such
appointment and hence, applicability of Section 12(5) does not arise is
concerned, this Court is of the view that the said contention does not merit
consideration in view of the amendment brought in by the 2015
Amendment and recognized by the Hon'ble Apex Court in its decisions in
TRF Ltd. and Perkin's Cases, which emphasized and settled the legal
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position that a person having an interest in the dispute or in the outcome
or decision thereof, must not only be ineligible to act as an arbitrator but
must also not be eligible to appoint anyone else as an arbitrator. In the
present case, no doubt, the respondents are having interest in the dispute
vis-a-vis the outcome and in the decision thereof, in the opinion of this
Court, would certainly be ineligible to act as Arbitrator, but also not eligible
to appoint any one including a retired Judge of this Court.
38. Further, a bare perusal of Section 12(5) discloses that 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 and in Seventh Schedule,
particularly, Clause (8) states that the arbitrator regularly advises the
appointing party or an affiliate of the appointing party even though neither
the arbitrator nor his or her firm derives a significant financial income
therefrom. Therefore, a reasonable and justifiable doubt may arise in the
minds of the petitioners that in the present case since the respondents had
particularly chosen and appointed the learned Arbitrator unilaterally, he
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might have been regularly advising the respondents even though he derived
no significant financial income. The very purpose to introduce Section
12(5) read with Seventh Schedule is to ensure the independence and
impartiality of arbitrators, which is the hallmark of any arbitration. If an
arbitrator falls within any of the categories under Schedule Seven, it will
strike at the very jurisdiction of the arbitrator to continue with the
proceedings.
39. In the light of the above discussion, this Court is of the
considered view that the learned Arbitrator who passed the Award, has
become de jure to perform his functions by reason of the statutory bar under
Section 12(5) r/w Schedule VII of the Act since appointed by the
respondent/Lessor, who is ineligible to nominate the learned Arbitrator.
40. It is very unfortunate that the respondents, having made illegality
in appointing the Arbitrator unilaterally in contravention of the amended
provision of law and the settled legal position, now, by placing untenable
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contentions, urged this Court to countenance and approve their unlawful
action, which this Court refrains to do so.
41. Since a contention raised on behalf of the respondents that the
petitioners have waived off their right to object the unilateral appointment
of the Arbitrator, this Court feels it appropriate to deal with the following
issue:
“Whether the petitioners have waived of their
right to object the appointment of the learned
Arbitrator in terms of proviso of Section 12(5) of the
Act?”
42. It is vehemently contended on behalf of the respondents that when
admittedly, the petitioners have participated in the arbitral proceedings
through out and at no point of time, they raised any objection with regard to
the unilateral appointment of the learned Arbitrator and further, the
petitioners have filed a joint memo dated December, 2020 seeking for
extension of the mandate of the Arbitrator, which demonstrates that the
petitioners expressly waived off their right to object. In this regard, a
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reference is made to the judgment of the Calcutta High Court in “McLeod
Russel India Ltd. v. Aditya Birla Finance Ltd., in Arb.Petn.No.106 of
2020, dated 14.02.2023, wherein the Court observed that the pleadings filed
by the petitioners before the Arbitrator would constitute an express
agreement as required under the proviso to S.12(5) of the Act.
43. However, according to the petitioners, they have not given any
express agreement in writing as required under proviso to Section 12(5)
agreeing to the unilateral appointment of the Arbitrator and thereby waived
off their right to object the same. It is further contended that even
participation in the arbitral proceedings, shall not bar the petitioners to
challenge the unilateral appointment under Section 34 r/w 12(5) of the Act.
Section 12(5) of the Act reads as under:
12(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”
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Proviso to Sub Section 5 to Section 12 of the Act reads as under:
“Provided that parties may, subsequent to disputes
having arisen between them, waive the applicability of this
sub section by an express agreement in writing.”
44. Therefore, it is clear that where under any agreement between the
parties, a person falls within any of the categories set out in the Seventh
Schedule, he is, as a matter of law, ineligible to be appointed as an
arbitrator. However, this ineligibility can be removed by the parties after
disputes have arisen between them, by waiving the applicability of this Sub-
section by an "express agreement in writing". Obviously, the "express
agreement in writing" has reference to a person who is interdicted by the
Seventh Schedule, but who is stated by parties (after the disputes have
arisen between them) to be a person in whom they have faith
notwithstanding the fact that such person is interdicted by the Seventh
Schedule.
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45. In the present case, it is not in dispute that there is no agreement
in writing as contemplated under proviso to Section 12(5) of the Act
whereby the petitioners had expressly agreed in writing to waive their right
regarding the applicability of Section 12(5) of the Act.
46. Further, the learned Arbitrator who is well aware than the parties
to the agreement about the settled legal position in the matter of unilateral
appointment, particularly, the disqualification contemplated under the
amended Section 12(5) r/w Schedule VII of the Act, after entering into
reference by way of unilateral appointment, at the first hearing itself, before
commencing the arbitral proceedings, shall fair enough ensure from the
parties whether they are willing to conduct the arbitral proceedings and also
insist upon waiver in writing in respect of applicability of Section 12(5) of
the Act and in the event any party does not appear despite receipt of notice,
he/shall not proceed further and immediately recuse or withdraw from the
arbitration. This is a fair practice which every Arbitrator who is appointed
unilaterally has to necessarily adopt before commencing the arbitral
proceedings and to insist upon express agreement in writing from them and
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record the minutes accordingly even despite both parties are co-operating to
participate in the proceedings, which would certainly save the time and
avoid the multiplicity of proceedings, otherwise, the entire proceedings
including the award would be rendered as bad in law and become liable to
be set aside.
47. In Hina Suneet's case (cited supra), this Court has categorically
held that the unilateral appointment of the Arbitrator in the absence of
consent in writing is in violation of Section 12(5) and that when a person is
ineligible to be appointed as Arbitrator, he is also ineligible to nominate any
Arbitrator. Relevant portion of the decision as found in paragraphs 11, 12
and 13 is extracted as under:
11. When a person is ineligible to be appointed
as Arbitrator, in the same way, he is also ineligible to
nominate any Arbitrator. This is what the Hon'ble Apex
Court has held in the Perkins case.
12. In the present case, the person appointed as
the Arbitrator is neither the employee, consultant,
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advisor or have any other past or present business
relationship or manager, director or part of the
management of the respondent. If any of the above
persons appointed as Arbitrator, those persons are
ineligible to act as an arbitrator in terms of Section
12(5) of the Act. In the same way, the above persons
are also not eligible to nominate any person as
Arbitrator to act on behalf of them or the concern.
13. In the present case, the respondent
appointed the arbitrator unilaterally without consent of
the petitioners. Section 12(5) of the Act states as
follows:
“12. Ground for challenge.-
(1).......................
(2).......................
(3).......................
(4).......................
(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: Provided that parties may, subsequent to
disputes having arisen between them, waive the
applicability of this sub-section by an express
agreement in writing.”
A mere perusal of the above makes it clear that
the persons mentioned in Schedule VII of the Act would
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be ineligible to be appointed as Arbitrator and the
persons mentioned in Schedule VII are also ineligible
to nominate any persons as arbitrator. Further there is
no express agreement, between the parties for
providing consent in writing for unilateral appointment
of the arbitrator. Hence, the unilateral appointment of
the arbitrator, made by the respondent is in violation of
provision of Section 12(5) of the Act.”
48. Further, this Court, in its recent decision in “G.Antony Kanselin
and another versus M/s.Naresh & Co., in Arb.O.P.(Com.Div.) No.600 of
2022 dated 05.04.2022, while dealing with the issue of unilateral
appointment, as regards the proviso to Section 12(5) of the Act, it has been
held as under:
“17. Further, proviso to Section 12(5) envisages
that the parties may subsequent to disputes having arisen
between them, waive the applicability of this sub-section
by an express agreement in writing. The definition of
'express and implied authority' is explicitly defined under
Section 187 of the Contract Act, which reads as under:
“187. Definitions of express and implied
authority. An authority is said to be express when it is
given by words spoken or written. An authority is said
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to be implied when it is to be inferred from the
circumstances of the case; and things spoken or
written, or the ordinary course of dealing, may be
accounted circumstances of the case.
18. A perusal of the above makes it clear that an
authority is to be implied when it is inferred from the
circumstances of the case and is said to be expressed
when it is given by words spoken or written. In the
present case, from the circumstances even if it is inferred
that the authority is implied by the act of the petitioners
having not raised any objection towards the appointment
of the Arbitrator made by the respondent unilaterally, the
same cannot be taken as implied authority inasmuch as
the proviso to Section 12(5) of the Act insists that the
'express agreement between the parties for providing
consent for unilateral appointment, must be in writing.
Therefore, if the consent is not in writing, no other
inference can be drawn contrary to what is provided
under the proviso to Section 12(5) of the Act.
49. Therefore, since the statutory provision mandates that the 'express
agreement between the parties for providing consent for unilateral
appointment, 'must be in writing' and if such consent is not in writing, no
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other inference can be drawn contrary to what is provided under the proviso
to Section 12(5) of the Act. In such view of the matter, this Court is unable
to fortify the reliance placed in this regard on behalf of the respondents to
the effect that no objection was raised by the party and fully participated in
the arbitral proceedings and mere filing the pleadings by the parties before
the Arbitrator would constitute an express agreement and thereby, it can be
construed that the parties have waived off their right to object the unilateral
appointment. The object behind getting the 'express agreement in writing'
from the parties who are willing to waive their right to object the unilateral
appointment is, only to know the confidence and faith reposed by the party
on the learned Arbitrator and to enable the Arbitrator to commence the
arbitral proceedings and complete the same.
50. However, a contention was raised by the learned counsel for the
respondents that in the case of Hina Suneet, this Court has not considered
the judgment of a Division Bench judgment of this Court, in “General
Manager, CORE, Allahabad versus JV Engineering Associates” in OSA.
No.119 of 2021. It is to be noted that in the said judgment, the Division
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Bench of this Court observed that to constitute an express agreement in
writing', three conditions have to be met, viz.,
"a) that there would have to be an express agreement in
writing;
b) that such express agreement in writing would
unequivocally waive the applicability of the relevant
sub-section;
c)such express agreement in writing must have been
executed at a time subsequent to the disputes having
arisen."
and further, the Bench also observed that to apply S.12(5), one party must be
made aware of the amendments made to the statute. It is held as under:
"Express waiver on the other hand would arise when the
right is specifically brought to the notice of the person, he
responds thereto and such response reveals his awareness
of his right; and, finally, the conscious relinquishment of
the known right."
51. In the above mentioned JV Engineering case, the respondent, vide
letter dated 13.09.2017 brought to the notice of the appellants therein about
the 2015 Amendment and requested for a proposed modification to the
arbitration agreement in light of the amendment to be accepted by the
Appellants. The Appellants, after the amendment were brought to their
attention, responded specifically stating that they opted to be governed by
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the already existing agreement. This exchange of correspondence
specifically brought to the knowledge of the Appellant about the effect of
the amendment. The Appellants' refusal to get the modified agreement in
terms of amended provision and still opting for their remedy in law by
virtue of their express letter dated 13.09.2017 was held to amount an
express wavier in writing under Section 12(5) of the Act. The facts
involved in JV Engineering case are quite different in Hina Suneet case,
wherein, there was no such correspondence between the parties and the
respondent therein unilaterally appointed the Arbitrator, who in turn failed
to send any notice about hearing to the petitioners and in such
circumstances, the award came to be set aside. Hence, the ratio laid down in
JV Engineering case is not applicable to the case on hand.
52. In view of the above discussion, it can be safely concluded that
the petitioners have not waived off their right to object the appointment of
the learned Arbitrator in terms of proviso of Section 12(5) of the Act.
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53. Now the this Court has to venture upon the issue as regards
whether the petitioners, without raising any objections or challenging the
inherent jurisdiction of the learned Arbitrator during pendency of the
arbitral proceedings, can challenge the unilateral appointment of the
Arbitrator while seeking to set aside the arbitral award under Section 34 of
the Act?
54. It is settled law that when an authority exercises jurisdiction
which does not possess, its decision amounts to a nullity in law. Thus, a
decision by an authority having no jurisdiction is non est in law and its
invalidity can be set up whenever it is sought to be acted upon. In the
present case, by virtue of amended Section 12(5) r/w Seventh Schedule of
the Act vis-a-vis landmark judgments of the Hon'ble Apex Court in TRF
Ltd. and Perkin cases, the learned Arbitrator, who was appointed
unilaterally and incurs disqualification, has become ineligible to be an
Arbitrator and the award passed by him, deserves to be set aside, more
particularly, as already observed, there is no express waiver in writing as
contemplated under the proviso to Section 12(5) of the Act.
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55. The endeavour of this Court is always to rectify the errors
apparent on the decisions/orders/judgments of the authorities/
Tribunals/lower Courts etc., at any stage of the matter in order to avoid
miscarriage of justice. Once this Court finds irregularity or illegality in the
orders/judgments of the lower authorities, while exercising inherent
jurisdiction, this Court can very well set right the same. In the present case,
the award itself was challenged under Section 34 of the Act primarily on the
ground that the appointment of Arbitrator is unilateral and cannot be
sustained.
56. In this regard, it is worthwhile to refer a judgment of the Hon'ble
Supreme Court reported in "Hindustan Zinc Ltd. v. Ajmer Vidyut Vitran
Nigam Ltd., (2019) 17 SCC 82, wherein, it has been held under as under in
para 16 and 17:
“16. Shri Vaidyanathan, learned Senior Counsel for the
appellant, has argued that the challenge to the award was only
on merits before the learned Commercial Court, and no
challenge was raised stating that the arbitrator's appointment
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itself would be without jurisdiction, both the parties having
agreed to the order dated 12-2-2007 to refer the matter to
arbitration. However, the said issue was argued and taken up
before the High Court in first appeal under Section 37 of the
Arbitration Act.
17. We are of the view that it is settled law that if there is
an inherent lack of jurisdiction, the plea can be taken up at any
stage and also in collateral proceedings. This was held by this
Court in "Kiran Singh v. Chaman Paswan [Kiran Singh
v.Chaman Paswan, (1955) 1 SCR 117 : AIR 1954 SC 340] as
follows : (SCR p. 121 : AIR p. 342, para 6)
“6. … It is a fundamental principle well-
established that a decree passed by a court without
jurisdiction is a nullity, and that its invalidity could be
set up whenever and wherever it is sought to be enforced
or relied upon, even at the stage of execution and even in
collateral proceedings. A defect of jurisdiction, whether
it is pecuniary or territorial, or whether it is in respect of
the subject-matter of the action, strikes at the very
authority of the Court to pass any decree, and such a
defect cannot be cured even by consent of parties. If the
question now under consideration fell to be determined
only on the application of general principles governing
the matter, there can be no doubt that the District Court
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of Monghyr was coram non judice, and that its judgment
and decree would be nullities.”
57. Therefore, this Court is of the considered view that irrespective of
the stage whether it is at the initial stage of the arbitral proceedings or at
stage of the execution of the award, the appointment of the Arbitrator can be
questioned, not particularly under Section 13 but also under Section 34 of
the Act and the same can be rectified by this Court. Merely the petitioners
failed to make a challenge under Section 13, it would not disqualify the
petitioners from raising the issue of ineligibility under Section 34
proceedings. Even assuming if an application is filed under Section 13 and
the same is rejected, no appeal can be filed against the said dismissal in
terms of provisions of Section 13(4) of the Act and the arbitral Tribunal
shall continue the arbitral proceedings and make the arbitral award.
Therefore, the said award can be challenged under Section 34 as provided
under Section 13(5) of the Act. Therefore, Section 13 itself provides the
way for challenging the appointment of the Arbitrator under Section 34 of
the Act. Hence, the failure on the part of the petitioners from challenging
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the appointment of the Arbitator under Section 13 would not disqualify
them to challenge the same under Section 34 of the Act.
58. In similar circumstances, the Calcutta High Court in
“Cholamandalam Investment and Finance Company Ltd. versus
Amrapali Enterprises and another” (EC 122 of 2022) has held that an
arbitration award passed by an unilaterally appointed arbitrator is non-est in
law and its enforcement would be refused even under Section 36 of the Act
even if the award was not set aside under Section 34 proceedings of the Act.
Though it was put to challenge under Section 34 of the Act, however, the
Court opined that the challenge may be time barred. It went on to hold that
executing Court also has the power to declare an ‘unilateral appointment
award’ is non-est in law and declare it to be null and direct the parties to re-
agitate their dispute before an independent and impartial arbitral tribunal.
The relevant portion as found in paragraphs 16 and 24 are extracted as
under:
“16. In my view, the impugned award, which was
passed by a de jure ineligible arbitrator, suffers from a
permanent and indelible mark of bias and prejudice which
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cannot be washed away at any stage including the execution
proceedings. In fact, as the arbitrator was de jure ineligible to
perform his functions and therefore lacked inherent
jurisdiction or competence to adjudicate the disputes in hand,
the impugned award cannot be accorded the privileged status
of an award.
“17. to 23. ... .... ...
24. Impartiality as discussed is the paramount principle
of arbitral proceedings and something which the Courts have
to safeguard at every stage of such proceedings. Even at the
stage of execution, the lady of justice cannot turn a blind eye
and let one party run over the other. The people vest faith in
the Court to safeguard their rights and uphold the principles of
natural justice, irrespective of procedural hurdles. Whatever
the case may be, including an execution case where Courts are
expected to simply enforce the award without further probing,
impartiality as a principle cannot be railroaded. Shackles of
procedural limitation in such cases will not prevent parties
from seeking the immunity of the Court. Parties making such
unilateral appointments couch behind procedural
technicalities to shield their unlawful act and reap the fruit of
their own mischief. Accordingly, even if an award is not set
side under the procedure established in section 34 of the Act,
the courts, at the stage of execution can step in and declare a
‘unilateral appointment award’ as non-est in law, declare the
same as a nullity and direct parties to re-agitate their issues
before a new arbitral tribunal constituted in accordance with
law.
59. Since the present Arbitrator was appointed against the amended
Section 12(5) of the Act and it is in contravention of Arbitration Act. An
contravention of the Arbitration Act itself would be regarded as patent
illegality as held by the Hon'ble Apex Court in in the case of “Associate
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Builders vs. Delhi Development Authorities” reported in 2015 3 SCC 49,
in para 42 as under:
“42.2. (b). A contravention of the Arbitration Act itself
would be regarded as a patent illegality — for example if an
arbitrator gives no reasons for an award in contravention of
Section 31(3) of the Act, such award will be liable to be set
aside.
60. In the present case as stated above, the appointment itself is not in
accordance with the amended Section 12(5) of the Act and it is in
contravention of the Arbitration Act and it would amount to patent illegality
and hence, the present award passed by a disqualified Arbitrator, is liable to
be set aside on the ground well.
61. In the above said judgment, it is also held that any violation of
provisions of the Act is against the public policy of India. The relevant
portion as found in para 27, reads as follows:
“Fundamental Policy of Indian Law
27. Coming to each of the heads contained in the Saw
Pipes judgement, we will first deal with the head "fundamental
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policy of Indian Law". It has already been seen from the
Renusagar judgement that violation of the Foreign Exchange Act
and disregarding orders of superior courts in India would be
regarded as being contrary to the fundamental policy of Indian
law. To this it could be added that the binding effect of the
judgement of a superior court being disregarded would be equally
violative of the fundamental policy of Indian law.”
62. In the present case, the respondents took the plea as if the
petitioners have waived off their right to object the unilateral appointment
of the Arbitrator. However, it is incumbent upon the respondent while
venturing to the appointment of the Arbitrator unilaterally, to aware of the
relevant amended provision of law, i.e. Section 12(5) of the Act and the law
laid down by the Hon'ble Apex Court and he should have obtained the
express agreement in writing from the other party for the unilateral
appointment of the Arbitrator. Admittedly, the respondents have not
provided in Section 21 notice issued to the petitioners, any time limit for
obtaining the consent in writing from them. In view of Section 12(5) vis-a-
vis Section 11(5) of the Act, the respondent should have waited for 30 days
for getting consent in writing from the other party after issuance of Section
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21 notice. In the event any consent in writing is provided by the petitioners
within the stipulated period of 30 days, then, the appointment made by the
respondents unilaterally, is well within the provisions of the Act. However,
in the present case, it is not in dispute that no consent was provided by the
petitioners and therefore, in the absence of consent in writing from the
petitioners, the appointment of the Arbitrator itself is considered as non-est
in law and the Arbitrator is disqualified to commence the arbitral
proceedings.
63. For all the foregoing reasons, this Court is of the considered view
that the award passed by the learned Arbitrator is liable to be set aside.
Since this Court arrived at the conclusion that the appointment of the
Arbitrator itself is non est in law and the award is liable to be set aside on
this ground, this Court would not traverse all other contentions raised by the
learned counsel on the merits of the award.
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64. In the result, these Arb.Original Petitions are allowed and the
common award, dated 22.03.2021 by the learned sole Arbitrator is hereby
set aside. Consequently, all connected Applications are closed.
65. In view of setting aside the common arbitral award in these
petitions by this Court, execution of the award does not arise. Hence, the
E.P. is dismissed as SR stage itself.
66. Since this Court set aside the award as it was passed by the
learned Arbitrator who is appointed unilaterally and being disqualified as
per Section 12(5) r/w Seventh Schedule of the Act, this Court feels it
appropriate to appoint an Arbitrator which will save time and avoid
multiplicity of proceedings. Accordingly, I am persuaded to exercise the
powers under sub-section 6 of Section 11 of the Act and pass the following
order :
i) Hon'ble Mr.Justice N.Kirubakaran (Rtd.,), residing at
No.36, 2nd Cross Street, Rayala Nagar, Ramapuram, Chennai
600 089, Contact No.9445025454, is appointed as Arbitrator
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to enter upon reference and adjudicate the disputes inter se the
parties.
ii) The learned Arbitrator appointed herein, shall after
issuing notice to the parties and upon hearing them, pass an
award separately in each of the matter as expeditiously as
possible, preferably within a period of six months from the
date of receipt of the Order.
iii) The learned Sole Arbitrator appointed herein shall be
paid fees and other incidental charges, fixed by him and the
same shall be borne by the parties equally. In the event of
non-appearance of the respondent, the petitioner shall bear the
entire remuneration and other expenses and thereafter, recover
the same directly from the respondent, vice versa.
20.04.2023
suk
Speaking/Non-speaking order
Index : Yes / No
Neutral Citation : Yes / No
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KRISHNAN RAMASAMY.J.,
suk
Arb.O.P (Com.Div.) No.257 of 2021 &
Arb.O.P(Com.Div).No.209 of 2022 etc.
20.04.2023
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