Party Can Waive Arbitrator's Ineligibility U/S 12(5) Of Arbitration Act By Express Agreement In Writing: Bombay High Court

Brief Facts

The present petition is filed under Section 34 of the Arbitration and Conciliation Act, 1996 (for short 'the Arbitration Act'), by the original claimant seeking to quash and set aside the arbitral award dated 4th February 2022, passed by the sole arbitrator.

On 5th May 2016, a tender was published by the Divisional Railway Manager (Mechanical), Central Railway, Mumbai (for short 'Railways') towards the work of Pest and Rodent Control, in railway passenger coaches maintained at CSTM, WB, MZN, DRT and LDT, Coaching Depots and Rodent Control in Coaching Depots yard and premises.

The petitioner participated in the tender process and on 7th June 2016, was declared as the successful bidder. Accordingly, the contract work of the said tender was awarded to the petitioner, for an amount of Rs.1,96,32,255/-. The contract period was for three years i.e. from 30th November 2016 to 29th November 2019.

Meanwhile, Government issued Notification on 19th January 2017, by which the rates of minimum wages payable to labourers were increased.Additionally, the railways issued a Joint Procedure Order (for short 'JPO') dated 20th December 2017, wherein all the contractors were permitted to foreclose their contracts on the condition that the contractors would continue the ongoing work till the finalisation of a new contract, and the minimum wages would be paid to the labourer till the foreclosure of the contract and no dues financial or otherwise shall be staked by the contractor.

The petitioner vide their letter dated February 2018 and a further letter dated January 2019 communicated their intention to withdraw from the contracted work as per the terms of the JPO. The railways accordingly on 8th January 2019 issued a new contract for the balance work and foreclosed the contract with the petitioner.

The petitioner claimed an additional manpower expense of Rs.20,91,522/- along with interest from the railways. As the said amount was disputed, the petitioner, on 7th December 2020, issued a legal notice to the railways and invoked Arbitration Clause.

The proceedings before the Arbitral Tribunal, consisting of Sole Arbitrator went ahead and after hearing both the sides the Sole Arbitrator, on 4th February 2022 passed an Award, thereby dismissing the claim of the petitioner.

Contentions

The petitioner submitted that the sole Arbitrator was appointed by the Railways, therefore, under the provisions of Section 12 (5) read with Schedule VII of the Arbitration Act, the award passed by the Sole Arbitrator who was himself de jure ineligible to be an Arbitrator, hence, the Award is void ab initio.

That the Waiver as mentioned under Section 12(5) of the Arbitration Act, was sought by the Railways, as per their demand. The Railways had by their letter dated 22nd February 2021 enclosed a standard proforma of the Waiver agreement which was made mandatory to be signed by both the parties. Therefore, the petitioner had no other option but to sign the Waiver Agreement under Section 12(5) of the Arbitration Act and thereafter, to proceed with the arbitration. Reliance was placed upon the the judgment of the Supreme Court passed in Ellora Papermills Limited vs. State of Madhya Pradesh (2022).

That the Railways deliberately neglected the representations made by the petitioner, requesting to invoke the price variation clause in the Contract Agreement and reimburse the increased amount payable in the form of wages to the workers.

Per contra, the respondent submitted that a bare reading of Section 34 of the Arbitration Act makes it clear that the grounds for raising a challenge to the Arbitral Award are restricted to those in Section 34(2). The petitioner in the present case except for making a feeble attempt to raise an objection to the appointment of the Arbitrator has not made out any case to set aside the award on any of the grounds under Section 34(2) of the said Act.

That the letter dated 18th December 2020 addressed to Senior Diksha Rane Divisional Mechanical Engineer (Coaching), Divisional Railway Manager (Mechanical) forwarded an Agreement signed by the petitioner and the respondent expressly waiving the applicability of Section 12(5) of the said Act. The documents of waiver are in writing and the same are executed post the dispute having arisen.

Court's Analysis

The court, at the outset, noted that in the present proceedings, the petitioner/claimant invoked the arbitration clause by its letter dated 7th December 2020 and at the time of invocation itself the claimant themselves have referred to Clause 64 of the contract which provided that “the Arbitral Tribunal shall consist of a Sole Arbitrator who shall be a Gazetted Officer of Railway not below JA Grade, nominated by the General Manager”.

Based on the above the court observed that being aware of this fact they have chose to go ahead with the Arbitration. The claimant had invoked the Arbitration clause by their letter dated 7th December 2020. The said letter was addressed by the claimant through their advocates hence, the claimant cannot now take a defence that they were not aware about the legal implications while they issued the letter of invocation of arbitration.

The court further noted that the respondent (railways) by their letter dated 14th December 2020 replied to the letter of the claimant of invocation of Arbitration clause. The said letter of the respondent (railways) dated 18th December 2020 mentioned that if there is an invocation of the Arbitration clause, the claimant should first waive the condition of applicability of sub-section (5) of Section 12. Adhering to this letter of the respondent (railways), the claimant by their letter dated 18th December 2020 agreed to waive away the provisions as mentioned in sub-section (5) of Section 12. So also, they attached a waiver letter duly signed by them.

Based on the above, the court observed that “In the present proceedings, the claimant by express agreement in writing had waived the applicability of sub-section 5 of Section 12. Therefore, the claimant at the stage of section 34 is bared from taking up a ground under Section 12(5) for challenging the award.”

The court noted that an appointment of arbitrator may be challenged by the parties only if any circumstances referred to Section 12 (3) subject to Sub-section (4) of Section 13 which provides for an agreement between the parties for such procedure for challenge. If such challenge is unsuccessful, the party have an option to take this ground while preferring an application for setting aside an arbitral award in accordance with Section 34 of Arbitration Act

The court further noted that when the arbitration proceedings commenced, the claimant had an option to file an application before the Arbitral Tribunal u/s. 16 read with Section 13 (2) of the Arbitration Act. However, the claimant has not taken up any such steps as contemplated u/s. 16 of the said Act.

Section 16 of the Arbitration Act, envisages the jurisdiction of the Arbitral Tribunal wherein if a party has to take an objection about the jurisdiction of the Arbitral Tribunal, the same can be made before the Arbitral Tribunal, and the Arbitral Tribunal can decide the same. If the said application is allowed, the Arbitral Tribunal proceedings come to an end. However, if such an application is not allowed, the same can be taken as a ground along with the other grounds while challenging to the Arbitral award, if it is against the said party. In the present proceeding, no such steps were taken up by the claimant, as contemplated under Section 13(2), the court observed.

The court relied on the Supreme Court judgment in HRD Corporation (Marcus Oil and Chemical Division) Vs. Gail (India) Limited , 2017 wherein it was held that if the arbitrator fails to file disclosure in terms of section 12(1) read with Fifth Schedule of the Arbitration and Conciliation Act, 1996, the remedy of the party in that event would be to apply under section 14(2) of the Arbitration and Conciliation Act, 1996 to the court to decide about the termination of the mandate of the arbitral tribunal on that ground. Such a course was not adopted by the petitioner either.

Having discussed the remedies the petitioner had against the appointment of an ineligible arbitrator, the court observed that “for the first time in the present proceedings which is filed u/s. 34, the claimants have raised an issue about sub-section (5) of Section 12. Only after the award is passed, in the present proceedings such an issue has been raised by the claimant. The same is a complete afterthought therefore is rejected.”

The court relied on the Supreme Court in Associate Builders vs. Delhi Development Authority – (2015) wherein the court has held that once it is found that the arbitrator's approach is neither arbitrary nor capricious, no interference is called for on facts. The arbitrator is ultimately a master of the quantity and quality of evidence while drawing the arbitral award. Patent illegality must go to the root of the matter and cannot be of trivial nature.

Accordingly, the present petition was dismissed as no ground for interference was made out.

Case Title: M/S. TRULY PEST SOLUTION PRIVATE LIMITED VS. PRINCIPAL CHIEF MECHANICAL ENGINEERING

Case Reference: ARBITRATION PETITION NO.43 OF 2023

Judgment Date: 11/11/2024

Adv. Shekhar Jagtap a/w. Adv. Ishan Paradkar i/b. J. Shekhar & Associates for petitioner.

Adv. Savita Ganoo a/w. Adv. D. P. Singh for respondent-UOI

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