Kerala High Court Lays Down Two Modes To Appoint Sole Arbitrator, Says Appointment Via Any Other Mode 'Ex Facie Bad'

The Kerala High Court on Tuesday held that a sole arbitrator can only be appointed either by a High Court or by an express agreement in writing between the parties in dispute, in the post-2015 amendment era of the Arbitration and Conciliation Act. 

Justice C.S. Dias also ruled that a sole arbitrator appointment through any other mode will be de jure ineligible to act as an arbitrator and that such an appointment will be ex facie bad and in contravention of the Act. 

On an analysis of the amended provisions of the Arbitration and Conciliation Act, 1996 and the exposition of the law laid down by the Hon'ble Supreme Court in the afore-cited decisions, it is abundantly clear that the law mandates that there should be neutrality not only for the Arbitrator but also in the arbitrator selection process as well.

The two modes to appoint a sole Arbitrator are as follows:

(i) by express agreement in writing between the parties, post the dispute, agreeing to waive the applicability of Section 12 of the Act or

(ii) by order of appointment by the High Court under Section 11 of the Act.

The respondent herein had entered into a hypothecation agreement with the petitioner, a non-banking finance company, to purchase a motor car. It was, inter-alia, agreed by the parties that any dispute between them would be settled in arbitration at Ernakulam. The respondent committed a breach of the agreement by not repaying the loan amount within the agreed time period. The petitioner thereby invoked the arbitration clause and issued a notice under Section 21 of the Act by suggesting the name of an arbitrator.

Since the respondent did not reply despite receiving the notice, the petitioner appointed a sole Arbitrator inferring that the respondent had accepted the proposed arbitrator. The sole arbitrator thereby passed an ad-interim award permitting the petitioner to repossess the vehicle.

The petitioner then filed an application before the Additional District Judge under Section 17(2) to enforce the interim award. The petitioner also filed an application to appoint an Advocate Commissioner to repossess the vehicle. Nevertheless, the District Court held it had no jurisdiction and ordered the return of the petition for representation to the proper Court, finding that the respondent was residing in Kottayam.

The petitioner approached the High Court challenging this order as irregular and unsustainable in law. 

Advocate Shiju Varghese appearing for the petitioner argued that an interim award can be enforced by a Court as agreed by the parties to the agreement and that it was not necessary to file the petition where the respondent is residing. Through several precedents, he also attempted to canvass the position that an award can be enforced anywhere in India and the property can be attached before judgment by a court even if the subject matter is outside its jurisdiction. 

When the Court proposed to issue notice to the respondent, it was pointed out by the petitioner that the practice of issuing prior notice to the respondent in such cases had been dispensed with. Accordingly, no notice was served on the respondent in the matter. 

Coming to the facts of the case, Justice Dias observed that as per the post-2015 amendment of the Act, a unilateral appointment of an arbitrator by an Authority which is interested in the outcome of the decision of the dispute is impermissible in law. Such an arbitrator becomes de jure incapacitated to perform his functions as an arbitrator.

Advocates Liji Vadakedom and Ranjith Varghese were appointed as amici curiae to assist the court in this issue. The amici curiae concurred with the Court's view and placed on record several precedents and interpretations on the issue. 

They submitted that in the post-amendment era of the Arbitration and Conciliation Act, a person falling within foul of Schedules V and VII of the Act is ineligible to be appointed or act as an Arbitrator unless, after the dispute, the parties enter into an express agreement in writing or the Arbitrator is appointed by the High Court under Section 11.

Moreover, Advocate Varghese asserted that when an interim award passed under Section 17(1) is sought to be enforced through the court under Section 17(2), there is no necessity to dispense with notice to the respondent. The Court accepted this argument and held that the respondent is entitled to notice in an application filed for enforcement. 

Upon going through the relevant law and decisions of the Supreme Court on the issue, the Single Judge found that the appointment of an Arbitrator as per the amended Act can only be through an express agreement or by the High Court. 

Regarding the question of can an interim award passed by an ineligible Arbitrator be enforced through a Court under Section 17 (2), it was held that a decree passed by the Court without jurisdiction goes to the very roots of the matter and the decree is a nullity.

"I have no doubt in my mind that an interim award passed by an arbitrator who was appointed in contravention of the provisions of the Act and the law laid down by the Honourable Supreme Court is bad in law and as a corollary to the same, the award is unenforceable."

The Single Judge added that the enforcement of an award is a serious matter and the court is cast with the responsibility to ascertain whether the interim award is passed by an arbitrator who is competent to be appointed in accordance with law.

"As observed in TRF Ltd v.Energo Engineering Projects Ltd, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Therefore, the interim award becomes worthless."

As such, the order of the District Court was set aside with a direction to reconsider the petitioner's plea in light of the relevant decisions and to see if the interim award passed by the Arbitrator was enforceable. The District Court was also directed to issue notice to the respondent and afford him an opportunity to file his written objection as well as to grant an opportunity to the petitioner to amend the pleadings if so requested.

The judgment was also ordered to be forwarded to all the competent courts in the State dealing with the applications filed under the Arbitration and Conciliation Act.

Case Title: M/s Hedge Finance Pvt. Ltd v. Bijish Joseph 

Citation: 2022 LiveLaw (Ker) 397

Click Here To Read/Download The Order