Executing Courts Can't Annul Arbitral Awards Solely On Ground Of Unilateral Appointment Of Arbitrator: Madras High Court

The court held that the executing court cannot suo motu annul the award when a party to the agreement did not challenge the award on the ground of ineligibility of the arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996. “As long as there is no objection raised, it cannot be said that a mere unilateral appointment of arbitrator would vitiate the entire arbitral proceedings which culminated in an award”, the court stated.

Brief Facts

The revision petitioner, a financial institution, referred a dispute arising out of a loan transaction to a sole arbitrator for adjudication. The arbitrator passed an award on 13.02.2018, directing the respondents to pay the petitioner a sum of Rs.1,68,047.26 along with interest, fee and other expenses. Based on the award, the revision petitioner initiated execution proceedings before the II Additional Subordinate Judge, Coimbatore.

The Executing Court, suo motu, dismissed the execution petition on 14.11.2024, holding that the arbitrator was appointed unilaterally and that the award made by the sole arbitrator was invalid due to a lack of inherent jurisdiction and as a result, was not enforceable and could not be regarded as a valid award.

The Petitioner filed the revision petition to challenge the order of the Executing Court dated 14.11.2024 which dismissed the Execution Petition in E.P.No.640 of 2018 in Arbitration case No. CP No.RJ/SF/302/2017.

Submissions

Mr. Arvind P. Datar, senior counsel for the Petitioner submitted that the executing court cannot suo motu annul the award when a party to the agreement did not challenge the award on the ground of ineligibility of the arbitrator under Section 12(5) of the Arbitration and Conciliation Act, 1996. He submitted that when the party to the arbitral proceedings did not choose to challenge the appointment of the arbitrator, the same would amount to a waiver of applicability of provision to Section 12(5) of the Act.

He also submitted that award passed by the arbitrator can be set aside only on an application under Section 34 of the 1996 Act. If the award passed by the arbitrator has not been challenged by the aggrieved party, such award shall be final and binding on the parties to the contract.

Observations

The court noted that the Executing court relying upon the judgments of Supreme Court in TRF Limited v. Energo Engineering Projects Limited and Perkins Eastman Architects DPC and others v. HSCC (India) Limited, suo motu, dismissed the Execution Petition holding that the award is non est due to lack of inherent jurisdiction on the ground of ineligibility of the arbitrator. In these cases, it was held that unilateral appointment of an arbitrator by one of the parties itself would come under the purview of disqualification by ineligibility.

The court observed that proviso to sub-section (5) of Section 12 of the Arbitration and Conciliation Act, 1996, provides an option to the parties to waive the applicability of provision to sub-section (5) by express agreement in writing. An objection as to the applicability can be raised under Section 12(5). “As long as there is no objection raised, it cannot be said that a mere unilateral appointment of arbitrator would vitiate the entire arbitral proceedings which culminated in an award”, the court stated.

The court referred to Kotak Mahindra Bank Limited v. Shalibhadra Cottrade Private Limited, where it was observed that the very fact that the proviso contemplates subsequent waiver of the objection as to ineligibility also unerringly indicates that the ineligibility does not render the entire proceeding void ab initio. It was also observed that “the ineligibility of the Arbitrator cannot be set up as a ground of inexecutability of an award in a proceeding under Section 36 of the 1996 Act for the first time”.

In Vasudev Dhanjibhai Modi v. Rajabhai Abdul Rehman, the court reiterated that:

“A court executing a decree cannot go behind the decree: between the parties or their representatives it must take the decree according to its tenor, and cannot entertain any objection that the decree was incorrect in law or on facts. Until it is set aside by an appropriate proceeding in appeal or revision, a decree even if it be erroneous is still binding between the parties.”

In ONGC Limited v. M/s. Modern Constructions and Company, it was held that “Executing court cannot go behind the decree and in absence of any challenge to the decree, no objection can be raised in execution”. Likewise, in Shivshankar Gurjar v. Dilip, it was held that “the executing court cannot go behind the decree; it has no jurisdiction to modify a decree; and it must execute the decree as it is”.

The court also placed reliance upon Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV), where it was held,

“Unilateral appointment clauses in public-private contracts are violative of Article 14 of the Constitution and the principle of express waiver contained under the proviso to Section 12(5) also applies to situations where the parties seek to waive the allegation of bias against an arbitrator appointed unilaterally by one of the parties.”

The court held that the words employed in Section 34 “recourse to a court against an arbitral award may be made only by an application for setting aside the award” make it clear that an award has to be set aside only in the manner known to law as provided under Section 34 of the Arbitration and Conciliation Act, 1996. “When a party to the award had not chosen to challenge the award within the time prescribed, such award shall be enforced in accordance with the provisions of the Code of Civil Procedure in the same manner as if it was a decree passed by the Civil Court”, the court observed.

The court held that the issue of ineligibility of the arbitrator cannot be raised during the pendency of the execution proceedings.

The court allowed the revision petition and set aside the impugned order dated 14.11.2024. The court directed that the Executing Courts should not suo motu dismiss the Execution Petition(s) solely on the ground of unilateral appointment of an arbitrator.

Case Title: M/s.Sundaram Finance Limited vs. S.M. Thangaraj & Ors.

Citation: 2025 LiveLaw (Mad) 40

Case Number: C.R.P.No. 5197 of 2024

For Petitioner: Mr.Aravind P. Datar, Senior Counsel for Mr. M.Arunachalam

Date of Order: 27.01.2025