Arbitrator's Discussion On Claims And Costs Exceeds Jurisdiction If Not As Per Arbitration Clause: Delhi High Court

Brief Facts:

The matter pertained to a petition which challenged an arbitral award which addressed disputes arising from a partnership deed. Ram Chander Aggarwal (Petitioner), who was the claimant in the arbitration, initiated proceedings after a dispute emerged between the parties. On July 2, 2018, the Petitioner appointed an arbitrator via letter. The arbitrator issued a notice to the Ram Kishan Aggarwal & Anr. (Respondents) prompting them to object to this unilateral appointment. The Respondents also filed an application with the arbitrator, who decided that the objection would be considered at the final hearing. Subsequently, the Respondents sought the termination of the arbitrator's mandate under Sections 14 and 15 of the Arbitration and Conciliation Act, 1996 by approaching the District Court, Patiala House. This petition was dismissed as it did not raise a valid ground under Section 14 of the Arbitration Act.

The arbitrator then framed several issues for determination. These included whether the arbitration tribunal was constituted in accordance with the partnership deed's arbitration clause, whether the claimant had a valid cause of action, and the claimant's entitlement to various financial claims, including a share of profits, stocks, goodwill, and dissolution of the firm M/s. Shree Om Steel Corporation. The arbitrator also considered whether the claimant was entitled to costs and other reliefs.

Regarding the first issue, the arbitrator noted that clause 18 of the partnership deed required that any disputes be referred to an arbitrator appointed by all parties. After examining the evidence, the arbitrator held that the unilateral appointment of the arbitrator by the claimant was contrary to this requirement, and thus, the appointment was invalid.

On the merits of the claims, the arbitrator reviewed the Petitioner's contentions but rejected them, except for awarding costs to the Petitioner. The operative part of the award stated that the claimant's petition was partly allowed only in terms of costs amounting to Rs. 3,44,450/-, to be paid by the Respondents within 15 days, with interest at 18% per annum if delayed.

The Petitioner challenged the rejection of his substantive claims.

Observations by the High Court:

The High Court addressed the issue of whether arbitral proceedings conducted by a unilaterally appointed arbitrator are permissible under the law. The High Court referred to the Supreme Court's decisions in TRF Limited v. Energo Engineering Projects Limited and Perkins Eastman Architects DPC v. HSCC (India) Limited. These decisions held that arbitral proceedings cannot be conducted by an individual who is ineligible under Section 12 of the Arbitration Act. The High Court held that this prohibition extends to arbitrators nominated by an ineligible person or entity.

Several Division Bench decisions of the High Court, including Ram Kumar v. Shriram Transport Finance Co. Ltd., Govind Singh v. Satya Group Pvt. Ltd., Kotak Mahindra Bank Ltd v. Narendra Kumar Prajapat, and Babu Lal & Anr. v. Cholamandalam Investment & Finance Co. Ltd. & Anr. reinforced this principle and held that such proceedings are void ab initio. The High Court held that even if no challenge is made under Section 34 of the Arbitration Act, an award rendered by a unilaterally appointed arbitrator is considered unenforceable. Moreover, it held that a challenge can be raised by the party that made the unilateral appointment.

The bench held that it was unnecessary to delve into Section 12 of the Arbitration Act because the arbitration clause explicitly required the arbitrator to be "appointed by all the parties." The arbitrator himself admitted that he was not appointed as required. This admission provided a solid ground for challenging the arbitration award under Section 34(2)(a)(v) of the Arbitration Act. Thus, the High Court held that the conclusion that the arbitrator was not appointed according to the arbitration clause was correct which made any further discussion on the merits of the claims and award of costs against the Respondents beyond the arbitrator's jurisdiction.

The High Court noted that such jurisdictional objections should ideally be resolved as preliminary issues. Although not a strict rule, resolving these objections early serves the goal of expeditious dispute resolution. The Respondents promptly raised this issue and filed an application before the arbitrator. The High Court noted that a more proactive approach in addressing these preliminary issues at the outset would have been beneficial.

Given these circumstances and with the consent of the parties' counsel, the High Court decided to set aside the award in its entirety.

Consequently, the High Court appointed Mr. Vinay K. Gupta, a former Principal District and Sessions Judge, as the new arbitrator to resolve the disputes.

Case Title: Ram Chander Aggarwal Vs Ram Kishan Aggarwal & Anr.

Citation: 2024 LiveLaw (Del) 960

Case Number: O.M.P. (COMM) 457/2022

Advocate for the Petitioner: Mr. Sidharth Joshi, Ms. Nidhi, Mr. Mohd. Zaki & Ms. Akshita Sharma, Advocates.

Advocate for the Respondent: Mr. Rajiv Thukral, Ms. Shivani Meena, Ms. Seema Seth, Mr. Sanjiv Saluja & Ms. Poorvi Jain, Advocates.

Date of Judgment: O.M.P. (COMM) 457/2022

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