Illegality Of The Appointment Procedure Does Not Render The Entire Arbitration Agreement Invalid: Bombay High Court

The bench of Justice Avinash G. Gharote held that merely because the procedure for the appointment of the arbitrator under the arbitration agreement is rendered invalid on account of the insertion of Section 12(5) and the Supreme Court judgment in Perkins Eastman, the same would not make the entire arbitration agreement unworkable.

The Court held that the choice of getting the dispute resolved through arbitration is one thing and the choice of a specific arbitrator is another thing and both are severable and different from each other. It held that the Courts while dealing with an arbitration clause that has partially become invalid can sever the illegal part and retain the remaining portion when the intention to arbitration is evident.

Facts

The parties entered into three agreements in the year 2017-18. The dispute resolution clause in all the agreement provided for the unilateral appointment of the arbitrator, it further provided that no person other than the person nominated by the respondent shall act as the arbitrator.

Disputes arose between the parties in all the three connected agreement. Accordingly, the petitioner filed the application under Section 11(6) of the A&C Act for the appointment of the arbitrator.

Contentions

The respondent objected to the maintainability of the petition on the ground that the arbitration clause provided for a conditional reference to arbitration and since the condition precedent of appointment of the arbitrator by the respondents has become invalid, the entire arbitration mechanism has become invalid, thus, the Court cannot appoint the arbitrator.

The petitioner argued that the invalidity of the appointment procedure on account of being in teeth of Section 12(5), cannot render the entire arbitration invalid and the Court can sever the illegal portion of the agreement as the intention to arbitrate is evident.

Analysis by the Court

The Court observed that the arbitration clause in all the three agreements provided for the unilateral appointment of arbitrator which has become invalid by the insertion of Section 12(5) to the Act and in view of the Supreme Court judgment in Perkins Eastman.

The Court held that the choice of getting the dispute resolved through arbitration is one thing and the choice of a specific arbitrator is another thing and both are severable and different from each other. It held that the Courts while dealing with an arbitration clause that has partially become invalid can sever the illegal part and retain the remaining portion when the intention to arbitration is evident.

The Court further held that mere illegality of the appointment procedure would not swipe the entire arbitration agreement into illegality. It held that what is impacted by Section 12(5) is the choice of the arbitrator and not the intention of the parties to arbitrate the dispute, thus, such intention must be respected.

Accordingly, the Court rejected the objection and allowed the petition.

Case Title: Sunil Kumar Jindal v. Union of India, Misc. Civil Application No. 543 of 2022

Date: 04.05.2023

Counsel for the Petitioners: Y.D. Shukla and M.U. Dastane

Counsel for the Respondents: N.G. Moharir

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