A Party To Dispute Cannot Nominate Arbitrator Even If The Arbitration Agreement Allows It: Kerala High Court

The Kerala High Court has held that neither a party to an Arbitration Agreement nor a person nominated by it can be nominated an arbitrator, even if the agreement expressly allows the same.  

With this notion, the Court went on to disregard the stipulations of the arbitration clause to the extent to which it allowed the lessor(respondent) to nominate the Arbitrator when the parties failed to arrive at a consensus nominee.

"....subsequent to the amendments to the Act in the year 2016 - through which sub-section (5) was inserted into Section 12 - notwithstanding any agreement to the contrary, any person whose relationship with the parties falls under any of the categories in the seventh Schedule of the Act, is rendered ineligible to be appointed as an Arbitrator."

Justice Devan Ramachandran relied on the Supreme Court's dictum in TRF limited v. Engineering projects Ltd. wherein the Apex Court had considered the effect of Section 12(5) of the Act and had unreservedly declared that neither a party to the disputes nor a person nominated by it can be appointed as an Arbitrator.

Background:

The petitioner, a private limited Company, approached the Court under Section 11(6) of the Act praying that the Court appoints a sole Arbitrator, to adjudicate and decide certain disputes which warranted resolution only through the mechanism of arbitration. Advocate Praveen K. Joy represented the petitioner in the matter.

Advocate G Sreekumar arguing for the respondents submitted that the Arbitration Request was not maintainable. According to him, the grounds raised by the petitioner ineluctably disclose that they have approached the Court under Section 11(5). 

He further argued that as per Section 11(5), the petitioner was obligated to wait for 30 days before initiating legal proceedings, which he failed to do. 

Additionally, there was another clause in the agreement that made an adscititious provision that if such consent was unable to be arrived at, an Arbitrator shall be appointed by the lessor, which is the respondent in the matter. 

The petitioner vehemently defended the maintainability of the petition contending that the agreement expressly disclosed the procedure agreed upon to appoint an Arbitrator. 

Key Findings: 

The Court in its judgment went on to analyze the interplay of Sections 11(5) and 11(6) of the Act, since both of them deal with the appointment of a sole Arbitrator, although in two subtly distinct scenarios.

It was thereby observed that a conjoined reading of Sections 11(2), 11(5), and 11(6) limpidly reveals that Section 11(5) would become attracted only in the cases where an agreement as to the procedure for appointment of an Arbitrator, as referred to in Section 11(2), between the parties has failed.

The Court relied on Clause 27 of the agreement between the parties which clearly provided for a specific procedure agreed between the parties for the appointment of an Arbitrator. Axiomatically, the mandate of Section 11(2) has been satisfied by the stipulations in this Clause; and resultantly, Section 11(5) cannot come into play, remarked the Court.

Since the parties had agreed on a procedure for appointing an Arbitrator, the Court could not favour with the submissions of the respondent that the Arbitration Request urged under Section 11(6) is vitiated for the reason of non-compliance of the rigour of Section 11(5).

As far as section 11(2) was concerned, the parties were at liberty to enter into an agreement for the procedure to appoint an Arbitrator, in which event, Section 11(6) alone would apply and the mandate of the provisions therein would guide the appointment. Therefore, the Court was not convinced that the matter would fall under the ambit of Section 11(5) as pressed for by the respondent.

The High Court went on to observe that it was the duty of the Court to affirmatively and conclusively determine if there is an agreement between the parties regarding the procedure for appointment of an Arbitrator and then to apply the correct and applicable sub-section of Section 11. 

Accordingly, the Arbitration Request was allowed and a sole Arbitrator was appointed to resolve the dispute between the parties.

Complying with the request made by the respondents that they were not financially sound to bear the costs of the arbitration, the Court went on to agree with the petitioner's suggestion and directed it to bear the entire fees and expenses of the arbitration proceedings.

The Arbitrator was thus asked to make appropriate provisions for this payment arrangement in his Award, depending upon the final result. 

Case Title: Tulsi Developers India Pvt. Ltd. v. Dr. Appu Benny Thomas

Click Here To Download Order