Waiver Of Arbitrator's Ineligibility Must Be Made By Agreement In Writing, Section 12(5) Does Not Provide For Deemed Consent: Bombay High Court

Brief Facts:

The Petitioners entered into a User Car Dealer/DSA Agreement (“Agreement”) with HDFC Bank Limited (“Respondent”). Clause 22 of the Agreement had an arbitration clause. It stipulated that the disputes between the parties were to be referred to a Sole Arbitrator nominated by the Respondent.

In September 2018, the Respondent demanded certain payments allegedly due under the Agreement. In case of failure to pay, the Respondents were intimidated that they'd be constrained to appoint a sole arbitrator as per the agreement. The Petitioners replied by disputing the amount owed and requesting a copy of the Agreement.

On the same day as the Petitioners' response, the Respondent nominated Dr. D.K. Sonawane as the Sole Arbitrator. Dr Sonawane consented and disclosed previous appointments by the Respondent within three years, as required by the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The arbitral proceedings began, and Dr. Sonawane pronounced the award. Feeling aggrieved, the Petitioners approached the Bombay High Court (“High Court”) to set aside the arbitral award under Section 34 of the Arbitration Act.

The Petitioners argued against the validity of Dr. Sonawane's unilateral appointment, contending it's impermissible under the law. The Respondent countered, stating the Petitioners' participation in arbitration proceedings implied consent to the appointment.

The Respondent further argued that the Arbitrator's award considered Petitioners' submissions and objections, with the only objection regarding limitation raised after the Arbitrator's mandate had expired. It highlighted instances where the Petitioners sought adjournments, delaying proceedings.

Observations by the High Court:

The High Court held that the Arbitrator was unilaterally appointed. Clause 22 of the Agreement stipulated that the Sole Arbitrator was to be nominated by the Respondent. This fact was corroborated by the Respondent's letter, where it asserted its intent to appoint the Sole Arbitrator according to the terms of Clause 22.

The argument put forth by the Respondent regarding the deemed consent of the Petitioners in the appointment of the Sole Arbitrator was rejected by the High Court. The High Court held that Section 12(5) of the Arbitration Act clearly outlines that any waiver of the ineligibility of an arbitrator must be made by express agreement in writing, as specified in the Seventh Schedule. In this case, according to the High Court, there was no such written consent from the parties to waive the applicability of this provision.

Consequently, the High Court set aside the arbitral award issued by the Sole Arbitrator.

Case Title: Riak Insurance and Financial Services & Ors. vs HDFC Bank Limited

Case Number: Arbitration Petition No. 30 of 2021

Advocate for the Petitioner: Mr Dharam Junani a/w Mihir Nerurkar & Sudip Mallick i/b Kiran Mohite

Advocate for the Respondent: Mr. Ashok Kotangle a/w Nikitesh Kotangle, Vishnu Chaudhari and Indu K.

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