Void Ab Initio Appointment Of Arbitrator, The Court Has Jurisdiction Under Section 11 Of A&C Act To Appoint A New Arbitrator: Madhya Pradesh High Court

The Single Bench of Justice Anand Pathak held that if the arbitrator is appointment unilaterally by the opposite party, the ineligible appointment deserves to be set aside and the arbitrator can be removed at the stage of passing of the award. The Court reiterated that unless the appointment of an arbitrator is ex facie valid, it does not debar the jurisdiction of the Court in Section 11 of the A&C Act in appointing a new arbitrator.

The respondent company M/s Forsight Infractech Pvt Ltd was awarded the contract of development and construction of a residential township. Subsequently, the respondent executed an agreement with the subcontractor/ applicant M/s Om Sai RK Constructions Pvt Ltd, wherein the respondent assigned the labour part of the construction work to the applicant. Thereafter, disputes arose between the parties with respect to payment. A notice was issued by the respondent to the applicant communicating that an authorized representative of the respondent company has appointed a Sole Arbitrator. The applicant raised an objection regarding the appointment of an arbitrator without its consent in the first meeting before the arbitrator.

Thereafter, the applicant informed the nominated arbitrator of its intention to not participate in the arbitral proceedings since the appointment of the arbitrator was contrary to law. The applicant had submitted that it wanted to approach the High Court for appointment of arbitrator and therefore, requested the nominated arbitrator not to commence the arbitration proceedings.

The applicant filed an application under Section 11 (6) of the A&C Act before the Madhya Pradesh High Court for appointment of an arbitrator.

The applicant Om Sai RK Constructions submitted before the High Court that the whole exercise of appointment of the arbitrator without consulting the applicant was bad in law. The applicant added that an arbitrator was nominated by an incompetent man purportedly appearing as an authorized representative of the respondent company.

Thus, the applicant contended that the arbitrator was not appointed as per law and the respondent had no authority to authorize a stranger to appoint an arbitrator as per Section 12 (5) of the A&C Act read with the Seventh Schedule of the A&C Act. Therefore, the applicant submitted that the appointment of the arbitrator unilaterally by the respondent through its power of attorney holder was invalid and liable to be quashed.

The applicant added that power under Section 11 of the A&C Act can be exercised by the Court even when the arbitrator has already been appointed by the respondent company, and the Court can set aside the appointment of an ineligible arbitrator and appoint an impartial arbitrator for adjudication.

The respondent Forsight Infractech contended that the application under Section 11 (6) of the A&C Act was not maintainable because the applicant did not issue any notice invoking arbitration before filing the application. The respondent submitted that since the applicant had submitted to the jurisdiction of the arbitrator, therefore, he could not rescind the said arbitration proceedings and seek another arbitration proceedings.

Section 12 (5) of the A&C Act provides 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 shall be ineligible to be appointed as an arbitrator.

The High Court perused the Arbitration Clause and held that as per the arbitration agreement between the parties, the dispute arising between the parties would be referred to an arbitrator to be appointed by the contractor/ respondent company, and the arbitrator had to appoint an umpire before entering upon the reference. Thus, the court held that the appointment of the Arbitrator and the Umpire was in the discretion of the respondent and thus was hit by Section 12 (5) of the A&C Act.

The High Court ruled that since the arbitration clause empowered a non-applicant to unilaterally appoint an arbitrator, therefore, the appointment of the arbitrator by the power of attorney holder of the respondent company was contrary to law.

The High Court noted that as per the law laid down by the Supreme Court in the case of Walter Bau Ag versus Municipal Corporation of Greater Mumbai (2015), unless the appointment of an arbitrator is ex facie valid, it does not debar the jurisdiction of the Court in Section 11 of the A&C Act in appointing the arbitrator.

The High Court ruled that the arbitration clause provided for a two-tier arbitration mechanism wherein the arbitrator could appoint the Umpire. However, the High Court added, the appointment made by the power of attorney holder on behalf of the respondent company curtailed the possibility of participation by the applicant in the process of appointment of the Umpire.

The Court added that the authority of the representative to appoint the arbitrator was itself in doubt in the absence of any Board Resolution authorizing the person to operate the agreement as per the law on behalf of the respondent company.

The Court held that once the appointment of arbitrator is void ab initio and the arbitrator is ineligible by virtue of Section 12 (5) of the A&C Act, then the procedure prescribed under Sections 12, 13 and 14 of the A&C Act for challenging the appointment of an arbitrator are not applicable.

The High Court ruled that since the appointment of the arbitrator at the instance of the respondent company was contrary to law, therefore, the ineligible appointment deserved to be set aside and the arbitrator could be removed at the stage of passing of the award.

The Court refuted the contentions of the respondent that the applicant submitted to the jurisdiction of the arbitrator. The Court added that the applicant did not submit to the jurisdiction of the arbitrator and had in fact informed the arbitrator about the unilateral and invalid appointment process and proceedings which were void ab initio.

The Court thus set aside the appointment of the arbitrator made at the instance of the respondent, as well as all the proceedings undertaken by the arbitrator. The Court thus allowed the petition of the applicant.

Case Title: M/s Om Sai RK Constructions Pvt. Ltd. versus M/s Forsight Infractech Pvt. Ltd.

Dated: 29.04.2022 (Madhya Pradesh High Court)

Counsel for the Applicant: Mr. Harish Dixit

Counsel for the Respondent: Mr. N. K. Gupta, Senior counsel with Mr. Kamal Mangal and Mr. Chetan Kanungo

Click Here To Read/Download Order