Participation In Arbitral Proceedings, Does Not Disentitle Party To Challenge Award On Ground Of Unilateral Appointment Of Arbitrator: Bombay High Court

The bench of Justice Manish Pitale held that Section 12(5) of the A&C Act can be waived only in terms of the proviso to Section 12(5).

The Court ruled that in the absence of framing of issues by the Arbitral Tribunal and consideration of the stand taken by a party, granting opportunity to the party to lead evidence is of no significance. Thus, the bench concluded that the award passed by the Arbitrator was in violation of the principles of natural justice.

A home loan agreement was executed between the respondent - Kotak Mahindra Bank Limited, and the petitioners. After certain disputes arose between the parties under the agreement, the respondent invoked the arbitration clause and unilaterally appointed an Arbitrator.

Before the Arbitral Tribunal, the petitioners raised a preliminary objection disputing the maintainability of the arbitration proceeding, which was rejected by the Arbitrator. The Arbitrator subsequently passed an award in favour of the respondents, against which the petitioners filed a petition under Section 34 of the A&C Act before the Bombay High Court.

The petitioners, including Naresh Kanayalal Rajwani, submitted before the High Court that since the Arbitrator was unilaterally appointed by the respondent, the entire arbitral proceedings, from the very inception, stood vitiated. The petitioners added that issues were not framed during the arbitral proceedings and that proper opportunity was not granted to the petitioners to lead evidence. Further, it averred that the appointment of the Arbitrator was hit by Section 12(5) read with the Seventh Schedule of the A&C Act. Thus, it contended that the arbitral award must be set aside.

Section 12(5) of the A&C Act provides that, notwithstanding any prior agreement to the contrary, if any person, whose relationship with the parties, counsel or the subject-matter of the dispute falls under any of the categories specified in the Seventh Schedule of the A&C Act, he shall be ineligible to be appointed as an arbitrator.

The proviso to Section 12(5) provides that the parties may, subsequent to the disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing.

The respondent- Kotak Mahindra Bank, averred that the petitioner had never raised an objection before the Arbitrator contending that it was ineligible to be appointed as an arbitrator under Section 12(5) of the A&C Act, read with the Seventh Schedule. Thus, the respondent argued that in view of Section 4 of the A&C Act, since the petitioners had participated in the arbitration proceedings without raising an objection, the petitioners had waived their right to raise such an objection.

The respondent added that since the agreement was executed between the parties in 2006, and Section 12(5) of the A&C Act was inserted vide the Arbitration and Conciliation (Amendment) Act, 2015 with effect from 23.10.2015, the provisions of Section 12(5) of the A&C Act were not applicable.

The respondent further submitted that the objection on the ground of Section 12(5) was not raised in the petition filed under Section 34 and therefore, the High Court must not rule on the said ground.

The High Court noted that the arbitral award was challenged by the petitioners before the High Court on the ground that it was perverse and against the settled provisions of law and public policy. The Court observed that though the said ground appeared to be general in nature, it would cover the specific ground raised under Section 12(5) of the A&C Act by the petitioners. The Court added that the objection raised under Section 12(5) is a pure question of law, which went to the root of the matter.

Perusing the arbitration clause, the High Court took into account that only the respondent Bank had the authority to appoint a sole Arbitrator for resolving the disputes between the parties.

The bench noted that the provisions of Section 12 (5) of the A&C Act operate 'Notwithstanding any prior agreement to the contrary'. Therefore, the Court ruled that even if any agreement executed prior to the introduction of the Arbitration and Conciliation (Amendment) Act, 2015 provides for the appointment of an Arbitrator, that falls foul of Section 12(5) read with the Seventh Schedule, Section 12(5) would apply in full force.

"A proper application of the above provision i.e. Section 12(5) of the Act is a complete answer to the contentions raised on behalf of the respondent – Bank. It is clear that there is no substance in the contention raised on behalf of the respondent – Bank that Section 12(5) read with Seventh Schedule as amended with effect from 23/10/2015, would not apply merely because the agreement between the parties was executed prior in point of time i.e. in the year 2006. The non-obstante clause, with which Section 12(5) of the aforesaid Act begins, destroys the very basis of the aforesaid submission made on behalf of the respondent – Bank."

While observing that Section 12(5) of the A&C Act can be waived only in terms of the proviso to Section 12(5), the Court added that the said procedure as specified in the proviso was not followed by the parties. Therefore, the bench held that it cannot be said that merely because the petitioners participated in the arbitration proceedings, they were disentitled from raising the ground that the arbitration proceedings were vitiated due to the unilateral appointment of the Arbitrator by the respondent.

"In the present case, as noted above, the arbitration clause gave power and authority to the respondent – Bank to unilaterally appoint the Arbitrator. As a matter of fact, in the present case, the learned Arbitrator was appointed unilaterally by the respondent – Bank, which was clearly in the teeth of the position of law clarified by the Supreme Court in the context of Section 12(5) of the said Act, read with Seventh Schedule thereof", the Court said.

Therefore, holding that the unilateral appointment of Arbitrator by the respondent was hit by Section 12(5) read with the Seventh Schedule of the A&C Act, the Court concluded that the arbitral proceedings were vitiated from the very inception and thus, the arbitral award was unsustainable.

The Court further noted that the Arbitrator had failed to frame issues in order to afford an opportunity to the parties to lead evidence, and that it had extended his mandate twice.

To this, the respondent Bank submitted that the minutes of the meeting recorded by the Arbitrator specifically stated that sufficient opportunities were granted to the petitioners to lead evidence, however, the petitioners had failed to lead evidence.

Rejecting the contention of the respondent, the Court ruled that in the absence of framing of issues by the Arbitral Tribunal and consideration of the stand taken by the petitioners, granting opportunity to the petitioners to lead evidence is of no significance.

Therefore, holding that the award passed by the Arbitrator suffered from serious procedural infirmities and was in violation of the principles of natural justice, the Court allowed the petition and set aside the award.

Case Title: Naresh Kanayalal Rajwani & Ors. versus Kotak Mahindra Bank Limited & Anr.

Dated: 23.11.2022 (Bombay High Court)

Counsel for the Petitioners: Dr. Abhinav Chandrachud a/w. Mr. Mehul Rathod a/w. Mr. Laxminarayan Shukla i/b. M/s. Legal Vision

Counsel for the Respondent: Ms. Chinmayee Ghag a/w. Mr. Nishant Ranan i/b. Zastriya

Citation: 2022 LiveLaw (Bom) 467  

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