Ineligibility Of Arbitrator Cannot Be Challenged First Time Under Section 34 Of Arbitration Act: Madras High Court

Brief Facts

This appeal has been filed under section 37 of the Arbitration Act against an order passed by the Learned Single Judge.

An arbitral award dated March 22, 2021 was set aside by the Learned Single Judge on the ground that the appointment of the Arbitrator was in contravention of the section 12(5) read with seventh schedule of the Arbitration Act. The dispute stemmed from a lease agreement between the appellant and the first respondent for a commercial space in Chennai. The agreement was unilaterally terminated during the lock-in period by the respondents.

Thereafter, arbitration clause in the agreement was invoked by the appellant in which damages to the tune of Rs. 11.88 crores was claimed. In the arbitration proceedings, the respondents participated without raising any objections or protest. Later when the award was against the respondents, they challenged the appointment of the Arbitration first time in a petition under section 34 of the Arbitration Act. In an award passed, the Arbitrator had awarded damages and costs to the appellant. However, this award was set aside by the impugned order on the ground that the Arbitrator was disqualified to be appointed under seventh schedule of the Arbitration Act.

Contentions:

Submissions of the Appellant:

The Learned Single Judge while setting aside the award has not specified as to which provision has been infringed by the appointment of the Arbitrator.

The Learned Judge failed to overlook the fact that the Arbitration was appointed by a joint application of both the parties and its mandate also got extended with the consent of the respondents.

Objections under section 12(5) based on TRF Limited and Perkins Judgments were raised first time in the petition under section 34 of the Act. The perkins judgment is not applicable to the proceedings initiated before this judgment was pronounced.

Submissions of the Respondents:

The unilateral appointment of the Arbitrator under the arbitration clause violated the Perkins Judgment which in turn also invalidated the entire arbitration proceedings.

Seeking extension of the mandate of tribunal does not tantamount to express waiver of objections under section 12(5) as held by the Delhi High Court in Umaxe Projects Private Limited v. Air Force Naval Housing Board.

Court's Analysis

The court noted that in the present case, it is an admitted position that the respondents participated in the arbitration proceedings without raising any objection and also consented to extend the mandate of the tribunal through a joint memo date May 5. 2021. The words which have been used in the memo indicate that there was no intention of the respondents to raise objections therefore it would constitute an express waiver under section 12(5) of the Arbitration Act.

The court further observed that although an arbitrator can be disqualified under section 12(5) if he falls in any of the categories specified under seventh schedule of the Arbitration Act, in the present case, it is clear such objections have been waived by the parties by their actions.

“The admitted position is the Sole Arbitrator did not have any relationship with the parties or counsel or the subject matter and did not fall under any of the categories specified in the Seventh Schedule to become ineligible to be appointed as an arbitrator. Therefore, the proviso also will not be applicable, because the question of waiver will apply only when Section 12(5) of the Act is applicable. If Section 12(5) of the Act is not applicable at all, the question of waiving the applicability by an express agreement in writing also would not arise.” the court observed.

It also noted that section 4 of the Act provides that when a party knows that any requirement under the arbitration agreement has not been complied with and yet proceeds with the arbitration without stating his objection to such non-compliance, such party shall be deemed to have waived his right to so object. Respondents were free to object to the Arbitrator appointment clause. They did not.

The court further observed that when the arbitration proceedings commenced in January - March, 2019 and subsequent thereto Perkins (supra) judgment was delivered by the Apex Court in November, 2019, still respondents never took any objection at such point of time or even thereafter. As noted earlier, subsequent thereto, in January, 2021, respondents filed the joint memo before the learned Arbitrator extending the term of the Arbitrator.

If there was any apprehension or objection to such appointment of the Sole Arbitrator, respondents would certainly not have made the joint application, since the extension under Section 29A of the Act can be obtained by either party.

“In fact, the conduct of respondents smacks of dishonesty and if such conduct is encouraged by courts by interfering in such factual circumstances, it would only amount to encouraging dishonest parties protracting the litigations and using the court as a tool to achieve their dishonest objectives. The conduct of respondents actually amounts to abuse of process of court.” the court observed.

The respondents raised objections against the appointment of the Arbitrator for the first time under section 34 of the Act when an adverse award was passed against them. In CORE, the Supreme Court has held that the Arbitrator is not automatically disqualified unless relationship with the parties is established under the categories in the seventh schedule. It was further held that parties may still raise “justifiable doubts” pertaining to the Arbitrator's independence and impartiality. The parties are not required to prove a lack of independence and impartiality but they only have to establish the existence of reasonable doubts.

In the present case, the respondents raised the objections to the appointment of the Arbitrator for the first time in the petition under section 34 of the Arbitration Act when an adverse award came to be passed against them. If they had reasonable apprehension that the arbitrator was ineligible under the Arbitration Act, they would have raised objections in the earlier proceedings.

Accordingly, the present appeals were allowed and the impugned order was set aside.

Case Title: VR Dakshin Private Limited Verus SCM Silks Private Limited

Citation: 2024 LiveLaw (Mad) 473

Case Number: O.S.A. (CAD) Nos.62 and 63 of 2023 and C.M.P.Nos.14361 and 14368 of 2023

Judgment Date: 26/11/2024