Delhi High Court Sets Aside Arbitral Award Due To Failure Of Arbitrator To Disclose Conflict, Non-Supply Of Documents

Background Facts:

The parties had entered into a Concession Agreement on 23.03.2018. The Agreement involved concession to develop, market, set up, operate, maintain, and manage retail outlets at various airports including the Chaudhary Charan Singh Airport in Lucknow. Disputes arose between the parties under the Agreement.

The petitioner inter alia claimed rebates/refund of concession fees (amounting to a total of Rs. 2.32 crores) towards the delay by the Respondent in security clearance, and cancellation of the invoices for the amount of Rs. 1.44 lakh and cancellation of any interest and/or penalty levied by the Respondent.

By the impugned award dated 11.08.2022, the arbitrator awarded approx. Rs. 20 lakhs with interest out of all the petitioner's claims.

The petitioner filed the petition under section 34 of the Arbitration and Conciliation Act, 1996 to challenge the award.

Contentions of the Petitioner:

• The award is vitiated by the failure of the arbitrator to comply with section 12(2) of the Act as he failed to disclose his appointment by respondent No. 1 in another arbitration, during the pendency of the arbitral proceedings.
• Section 24 of the Act had been violated by the arbitrator, who received documents and clarifications from the respondent after the order was reserved. These documents and clarifications were not copied to the petitioner and were considered without giving the petitioner an opportunity to respond.

Observations:

1. Re: Violation of Section 12 of the Act

The court referred to the judgment of the Supreme Court in Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd, where the purpose behind Section 12 of the Act and the Fifth Schedule had been explained:

“Section 12 has been amended with the objective to induce neutrality of arbitrators viz. their independence and impartiality. The amended provision is enacted to identify the “circumstances” which give rise to “justifiable doubts” about the independence or impartiality of the arbitrator. If any of those circumstances as mentioned therein exists, it will give rise to justifiable apprehension of bias. The Fifth Schedule to the Act enumerates the grounds which may give rise to justifiable doubts of this nature. Likewise, the Seventh Schedule mentions those circumstances which would attract the provisions of sub-section (5) of Section 12 and nullify any prior agreement to the contrary.”

The court held that Arbitrators must provide complete and comprehensive disclosure of any factors that may cast doubt on their independence or impartiality in order to ensure informed consent for the submission of disputes to private tribunals. According to Section 12(2), such an obligation is not discharged by a pre-reference disclosure, but remains "throughout the arbitral proceedings". The court held that the arbitrator was required to disclose to the petitioner, the fact of his appointment by the respondent in a subsequent case.

The court referred to the judgment of the Supreme Court in Union of India & Ors. v. Sanjay Jethi & Anr., wherein it was observed that:

“the question of bias would arise depending on the facts and circumstances of the case. It cannot be an imaginary one or come into existence by an individual's perception based on figment of imagination…. the challenge of bias, when sustained, makes the whole proceeding or order a nullity, the same being coram non judice.”

The court observed that sub-section (1) and (2) of section 12 require the disclosure to be made “in writing”. A telephonic/verbal disclosure would not suffice.

The court referred to Ram Kumar v. Shriram Transport Finance Co. Ltd., where the court, interpreting Section 12(1) of the Act, has held that the requirement of disclosure is mandatory and not at the discretion of the arbitrator. The court observed that the same position applies to the duty of continuous disclosure in Section 12(2).

The court stated that the requirement of disclosure extends not just to several appointments by the same party, but also by “an affiliate of one of the parties”. The practical problem of treating a large organisation in this manner, that one department may be unaware of the appointments made by another, is a red herring, because the duty of disclosure, as held in Ram Kumar, is on the arbitrator, not the litigant.

The court allowed the petitioner's challenge on the ground of a violation of section 12.

2. Re: Non-supply of documents to the petitioner

The court referred to Ssangyong Engg. & Construction Co. Ltd. v. NHAI, which has held that when a party has not had an opportunity to comment or make submissions on evidence furnished by the opposing party under Section 18 of the Act, a ground for setting aside an award under Section 34(2)(a)(iii) of the Act is made out.

The court noted that the petitioner was given only one working day to respond to the documents.

The court observed that Section 24(3) of the Act reflects a facet of natural justice, that a party must be given the materials supplied by the other party to the arbitral tribunal and have an opportunity to respond. It held that Respondent No. 1 breached this principle when it did not mark the e-mail to the petitioner.

The court held that there was a violation of Section 18 of the Act, which requires parties to be given a fair chance to present their case.

The court allowed the petition and set aside the impugned award.

Case Title: FLFL TRAVEL RETAIL LUCKNOW PRIVATE LIMITED Vs. AIRPORTS AUTHORITY OF INDIA & ANR.

Case No.: O.M.P. (COMM) 485/2022 & I.A. 20548/2022

Counsel for Petitioner: Mr. Rajshekhar Rao, Sr. Advocate with Mr. D. Verma, Ms. Neha Sharma, Mr. Harshad Gada, Advocates with Mr. Darpan Mehta, VP, Development.

Counsel for Respondents: Mr. Arun Sanwal and Mr. Akshit Gupta, Advocates.

Date of Judgment: 08.10.2024