Delhi HC sets aside arbitral awards for unilateral arbitrator appointment violating Section 12(5) Arbitration Act 1996

Delhi HC set aside arbitral awards due to unilateral appointment of sole arbitrator by respondents from restricted panel of three names, violating Section 12(5) of Arbitration Act 1996. Court held that petitioner's objection to proposed names required respondents to approach court under Section 11(5) for arbitrator appointment. Respondents' argument of waiver through petitioner's participation in proceedings was rejected, as express written agreement waiving Section 12(5) applicability is mandatory. Arbitrator's ineligibility rendered awards nullity. Parties permitted to reagitate claims before new arbitral tribunal.

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in these connected petitions are:

• Whether the unilateral appointment of the sole Arbitrator by the Respondent, despite the Petitioner's explicit non-acceptance of the proposed panel, rendered the Arbitrator ineligible under Section 12(5) of the Arbitration and Conciliation Act, 1996 (the '1996 Act')Rs.
• Whether the arbitration clause empowering the lessor to propose three names for the lessee to choose from, without a broad-based panel, complies with the principles of party autonomy and impartiality as laid down by the Supreme CourtRs.
• Whether the Petitioner waived its right to object to the Arbitrator's appointment by withdrawing objections during arbitration proceedings or by participating in the proceedingsRs.
• Whether an arbitral award rendered by an arbitrator appointed unilaterally and thus ineligible under Section 12(5) of the 1996 Act is valid and binding on the partiesRs.
• Whether the impugned arbitral awards should be set aside on the ground of the Arbitrator's ineligibility, without examining the merits of the underlying disputesRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of the Unilateral Appointment of the Arbitrator

The arbitration clause (Clause 25) in the lease deeds empowered the lessor (Respondent) to appoint a sole Arbitrator by proposing three names to the lessee (Petitioner), who was to choose one. The Petitioner, however, unequivocally rejected the proposed panel of three former Judges and refused to nominate any arbitrator from the list. Despite this, the Respondent appointed a sole Arbitrator unilaterally and informed the Arbitrator accordingly.

The Petitioner objected to this unilateral appointment, citing mala fide conduct and the absence of any provision in the arbitration clause to deal with non-acceptance of the proposed names. The Petitioner also indicated its intention to invoke Section 11(5) of the 1996 Act for appointment of the Arbitrator by the Court.

The Court referred extensively to the Supreme Court's landmark ruling in Perkins Eastman Architects DPC v. HSCC (India) Limited, which emphasized the principle of party autonomy and held that unilateral appointment of an Arbitrator is impermissible as it violates the natural justice principle of nemo judex in causa sua. The Court also relied on TRF Limited v. Energo Engineering Projects Limited and Bharat Broadband Network Limited v. United Telecoms Limited, which reaffirmed that an arbitrator appointed unilaterally by a party interested in the dispute is ineligible under Section 12(5) of the 1996 Act.

The Court found that the Respondent's unilateral appointment of the Arbitrator, despite the Petitioner's clear rejection of the proposed panel, was contrary to the settled legal position and rendered the Arbitrator ineligible to act.

Issue 2: Validity of the Arbitration Clause's Procedure for Appointment

The Court examined whether the arbitration clause's procedure-where the lessor proposes three names and the lessee chooses one-complied with the requirement of a broad-based panel as mandated by the Supreme Court in Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd. The Supreme Court had held that a panel must be broad-based, including persons of diverse backgrounds and not limited to a narrow category, to instil confidence in impartiality and independence.

The Court observed that the clause restricted the Petitioner's choice to only three names selected at the Respondent's discretion, which is a narrow and restrictive panel. This procedure was held not to conform with the principles laid down in Voestalpine and related judgments, as it could give rise to apprehensions regarding impartiality.

Thus, the Court held that the arbitration clause's appointment procedure was deficient and did not meet the standards of party autonomy and impartiality required under law.

Issue 3: Waiver of Objection to Arbitrator's Appointment by the Petitioner

The Respondent contended that the Petitioner waived its right to object to the Arbitrator's appointment by withdrawing objections during the preliminary hearing on 09.11.2020 and by participating in the arbitration proceedings thereafter.

The Court rejected this contention, relying on the Supreme Court's decision in Bharat Broadband Network Limited, which clarified that waiver under Section 12(5) of the 1996 Act requires an "express agreement in writing" subsequent to the dispute arising. Mere conduct, statements made during proceedings, or participation in arbitration cannot substitute for such express written waiver.

The Court also referred to decisions of this Court including Score Information Technologies Limited v. GR Infra Projects Limited and Larsen and Toubro Limited v. HLL Lifecare Limited, which held that a statement recorded in the order sheet or participation in proceedings does not amount to an express waiver. The Petitioner had consistently objected in writing from the outset and never provided a written waiver as required.

Therefore, the Court concluded that the Petitioner did not waive its right to object to the Arbitrator's appointment.

Issue 4: Validity and Binding Nature of the Arbitral Award Rendered by an Ineligible Arbitrator

The Court examined whether an arbitral award rendered by an arbitrator who is ineligible under Section 12(5) of the 1996 Act can be considered valid and binding.

The Court relied on the Division Bench judgment in Govind Singh v. Satya Group Pvt. Ltd., which held that such an award is without jurisdiction and cannot be treated as an arbitral award. The ineligibility of the Arbitrator goes to the root of jurisdiction and vitiates the award. The Court further noted that this principle has been consistently upheld in various judgments, including Kotak Mahindra Bank Ltd. v. Narendra Kumar Prajapat, where enforcement of such awards was refused.

Accordingly, the Court held that the impugned awards are liable to be set aside on the ground of the Arbitrator's ineligibility.

Issue 5: Whether to Decide Merits of the Claims or Set Aside Awards on Jurisdictional Grounds

The Court observed that since the objection regarding the Arbitrator's appointment goes to the jurisdictional root of the arbitral proceedings, it is appropriate to decide this preliminary issue before considering the merits of the claims.

Consequently, the Court refrained from expressing any opinion on the merits of the disputes and set aside the awards solely on the ground of the Arbitrator's ineligibility.

3. SIGNIFICANT HOLDINGS

The Court's crucial legal reasoning is encapsulated in the following verbatim excerpts:

"The ethos and first principle on which the arbitration mechanism functions is party autonomy i.e. freedom to choose an Arbitrator acceptable to both parties to the agreement, embedded in the principle of natural justice that 'no man can be a judge of his own cause' i.e. 'Nemo judex in causa sua'."

"Unilateral appointment of an Arbitrator will be vitiated under Section 12(5) of the 1996 Act as it hits the principle of autonomy."

"The procedure for appointment of the arbitrator (if any) shall necessarily be in terms of the observations of the Supreme Court in Voestalpine Schienen GmbH (supra)."

"The proviso to Section 12(5) mandatorily requires 'an express agreement in writing'. Mere recording by the Arbitrator, cannot be construed as an express agreement."

"No conduct, howsoever extensive or suggestive is sufficient to waive the applicability of Section 12(5) of the 1996 Act; only an express agreement in writing subsequent to the dispute arising can do so."

"An arbitral award rendered by a person who is ineligible to act as an arbitrator cannot be considered as an arbitral award. The ineligibility of the arbitrator goes to the root of his jurisdiction."

Core principles established include:

• Party autonomy in arbitrator appointment is fundamental and must be respected.
• Unilateral appointment of an arbitrator, especially from a restricted panel without mutual consent, is impermissible and renders the arbitrator ineligible under Section 12(5).
• Waiver of ineligibility under Section 12(5) requires an express written agreement post-dispute; conduct or oral statements are insufficient.
• An arbitral award rendered by an ineligible arbitrator is void and non-binding.
• Procedures for arbitrator appointment must ensure a broad-based panel to avoid apprehensions of bias.

Final determinations on each issue are:

• The unilateral appointment of the Arbitrator by the Respondent was invalid and rendered the Arbitrator ineligible under Section 12(5) of the 1996 Act.
• The arbitration clause's procedure for appointment, restricting choice to a narrow panel of three names proposed by the Respondent, does not conform with the requirement of a broad-based panel and party autonomy.
• The Petitioner did not waive its right to object to the Arbitrator's appointment as no express written waiver was given.
• The arbitral awards passed by the ineligible Arbitrator are without jurisdiction and must be set aside.
• The Court set aside the impugned awards on jurisdictional grounds without expressing any opinion on the merits, allowing parties to re-agitate their claims before a properly constituted Arbitral Tribunal.

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