2023 (4) TMI 315 - HC - Indian Laws

Arbitral award set aside for invalid arbitrator appointment violating law and natural justice

The court set aside the arbitral award due to the respondent's unilateral appointment of the arbitrator, which was deemed invalid and in violation of ... Unilateral appointment of arbitrator - ineligibility under Section 12(5) of the Arbitration and Conciliation Act, 1996 - Seventh Schedule disqualifications - violation of principles of natural justice - award contrary to public policy of India - challenge under Section 13 and remedy under Section 34 of the ActUnilateral appointment of arbitrator - ineligibility under Section 12(5) of the Arbitration and Conciliation Act, 1996 - Seventh Schedule disqualifications - Validity of the respondent's unilateral appointment of a sole arbitrator under the loan agreement - HELD THAT: - The Court held that a unilateral appointment of a sole arbitrator by a party is impermissible where such appointment violates the disqualifications prescribed by the Seventh Schedule and Section 12(5) of the Act. Relying on Perkins Eastman Architects DPC v. HSCC (India) Ltd., the Court reasoned that a person who is ineligible to act as an arbitrator under Section 12(5) cannot exercise the power to nominate an arbitrator; once the appointing authority is or would be ineligible, any purported sole appointment or nomination by it is vitiated. Applying that principle to the contractual Clause permitting the respondent to appoint a sole arbitrator, and noting absence of any written post-dispute waiver, the Court found the unilateral appointment to be non-est in law and in violation of Section 12(5). [Paras 9, 11, 12, 13, 14]The unilateral appointment of the arbitrator by the respondent was held invalid and non-est in law for contravening Section 12(5) and the Seventh Schedule.Challenge under Section 13 and remedy under Section 34 of the Act - award contrary to public policy of India - Whether failure to challenge the appointment under Section 13 precludes a later challenge under Section 34 for contravention of Section 12(5) - HELD THAT: - The Court rejected the respondent's contention that the petitioners' omission to seek recourse under Section 13 before the arbitral tribunal barred them from invoking Section 34. The Court held that parties remain entitled to challenge an award under Section 34 if the award is tainted by violations of the Act, including breaches of Section 12(5). Such violations engage public policy; therefore non-initiation of proceedings under Section 13 does not oust the jurisdiction to set aside an award under Section 34 when statutory disqualifications or similar illegality are shown. [Paras 15, 16]The petitioners' failure to invoke Section 13 did not preclude them from challenging the award under Section 34 for contravention of Section 12(5); Section 34 remedy remained available.Violation of principles of natural justice - award contrary to public policy of India - Whether the absence of notice, opportunity to file a counter and the ex parte conduct rendered the award vitiated by breach of natural justice and public policy - HELD THAT: - The Court found that the arbitrator did not serve notices of hearings nor did the respondent furnish a claim statement to the petitioners, resulting in the petitioners having no opportunity to contest the claim. The Court held that such denial of opportunity violated the principles of natural justice. Coupled with the invalid unilateral appointment, these defects rendered the award contrary to the fundamental policy of Indian law and public policy, warranting its setting aside. The Court applied the principle that awards produced by proceedings in breach of statutory disqualifications and natural justice are unsustainable. [Paras 17, 18, 19, 20]The award was set aside for violation of natural justice and because it was contrary to public policy of India.Final Conclusion: The Court allowed the arbitration petition and set aside the ex parte award dated 30.08.2021, holding the respondent's unilateral appointment invalid under Section 12(5) and the Seventh Schedule, and concluding that the award was vitiated by breaches of natural justice and public policy. Issues Involved:1. Unilateral appointment of the Arbitrator.2. Violation of Section 12(5) of the Arbitration and Conciliation Act, 1996.3. Lack of notice and opportunity to the petitioners.4. Violation of Principles of Natural Justice.5. Public policy of India.Issue-wise Detailed Analysis:1. Unilateral Appointment of the Arbitrator:The petitioners challenged the ex-parte arbitral award on the ground that the respondent unilaterally appointed the sole Arbitrator without their consent. The appointment was made through a letter dated 05.02.2021, referencing the Loan-cum-Hypothecation Agreement dated 27.11.2019. The petitioners argued that such unilateral appointments are non-est in law, citing the Supreme Court's decision in *Perkins Eastman Architects DPC Vs. HSCC (India) Ltd.*, which held that any unilateral appointment of an Arbitrator without the consent of the other party is invalid.2. Violation of Section 12(5) of the Arbitration and Conciliation Act, 1996:The petitioners contended that the unilateral appointment of the Arbitrator violated Section 12(5) of the Act, which states that any person related to the parties or the dispute as specified in the Seventh Schedule is ineligible to be appointed as an Arbitrator. The proviso to this section allows for such appointments only if both parties expressly agree in writing, which did not occur in this case. The court affirmed that the unilateral appointment was indeed in violation of Section 12(5).3. Lack of Notice and Opportunity to the Petitioners:The petitioners also argued that they were not given any notice by the Arbitrator or provided with the respondent's claim statement, which deprived them of the opportunity to file a counter and contest the matter. The court noted that the Arbitrator failed to send any notice about the hearings, and the respondent did not furnish the claim statement to the petitioners, thereby denying them the opportunity to present their case.4. Violation of Principles of Natural Justice:The court observed that the lack of notice and the opportunity to be heard resulted in a violation of the Principles of Natural Justice. The petitioners were not given a fair chance to participate in the arbitral proceedings, which is a fundamental requirement for any judicial or quasi-judicial process.5. Public Policy of India:The court emphasized that any award passed in violation of the provisions of the Act, including the unilateral appointment of an Arbitrator and the denial of natural justice, is against the public policy of India. The Supreme Court in *Associate Builders vs. Delhi Development Authority* held that such violations are contrary to the fundamental policy of Indian law.Conclusion:The court concluded that the unilateral appointment of the Arbitrator by the respondent was non-est in law and in violation of Section 12(5) of the Act. Additionally, the Arbitrator's failure to provide notice and the respondent's failure to furnish the claim statement violated the Principles of Natural Justice. Consequently, the award dated 30.08.2021 was set aside as it was not sustainable under law and was against the public policy of India. The Arbitration Original Petition was allowed.