Even Without Further Allegation Of Bias Under Section 12(5) Of Arbitration Act, Unilaterally Appointed Arbitrator Is Ineligible: Calcutta High Court

The bench held that in addition to the grounds specifically mentioned in Section 12(5) read with the Seventh Schedule unilateral appointment of Arbitrator by one of the parties itself has also been brought under the purview of disqualification by ineligibility.

Further, the High Court held that unilateral appointment arbitrator ineligibility under Section 12(5) of the Arbitration and Conciliation Act, 1996 does not void an arbitral proceeding and its consequential award ab initio.

Section 12(5) states that any person whose relationship with the parties or the subject matter of the dispute falls within the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator.

Brief Facts:

Kotak Mahindra Bank Limited (“award-holder”) approached the High Court and filed an application under Section 36 of the Arbitration and Conciliation Act, 1996 for enforcement of an ex parte award. Shalibhadra Cottrade Pvt. Ltd. (“award-debtor”) challenged this application and argued that the appointment of the Arbitrator was unilateral. The award-debtor claimed that the Arbitrator was de jure ineligible under Section 12(5), read with the Seventh Schedule, making the award void ab initio and therefore unenforceable.

In contrast, the award-holder argued that Section 36 of the Arbitration Act creates a legal fiction regarding the enforcement of an award in line with the Code of Civil Procedure, making Section 47 CPC inapplicable as Section 34 prescribes the grounds for challenging an arbitral award. It argued that a challenge to an award's nullity must be made under Section 34 and not in enforcement proceedings.

Observations by the High Court;

The High Court referred to the decision of the Supreme Court in Bharat Broadband Network Ltd. v. United Telecoms Ltd where the Supreme Court held that the proviso to Section 12(5) of the Arbitration Act would apply only if, after disputes have arisen, the parties expressly agree in writing to waive the applicability of Section 12(5).

However, the Supreme Court in Bharat Broadband Network Ltd. further observed that in cases falling under Section 12(5), Section 14(1)(a) of the Arbitration Act becomes relevant because the Arbitrator becomes de jure unable to perform his functions under Section 12(5) and thus ineligible to be appointed as an Arbitrator. Consequently, the Arbitrator's mandate automatically terminates. The Supreme Court pointed out that if a controversy arises regarding whether the Arbitrator has become de jure and unable to perform his functions, a party must apply to the court to decide on the termination of the mandate unless otherwise agreed by the parties.

The High Court noted that the objecting party did not object to the jurisdiction or capacity of the Arbitrator until the arbitral proceeding was over. The High Court referred to its decision in Cholamandalam Investment and Finance Company Ltd. vs. Amrapali Enterprises and Another and observed that awards passed by a unilaterally appointed Arbitrator are non-est in the eyes of the law.

In Perkins Eastman Architects DPC and Another Vs. HSCC (India) Limited, the Supreme Court considered two categories of cases: first, where the Managing Director of one of the parties is named as an Arbitrator with the additional power to appoint any other person as an Arbitrator, and second, where the Managing Director is not to act as an Arbitrator himself but is empowered to appoint any other person as an Arbitrator. The Supreme Court brought both categories within the purview of ineligibility. Thus, beyond the criteria of ineligibility stipulated in Section 12(5) read with the Seventh Schedule, the Supreme Court added the ground of unilateral appointment as a criterion of ineligibility.

In TRF Limited Vs. Energo Engineering Projects Limited, the Supreme Court similarly held that once the named Arbitrator becomes ineligible by operation of law (in that case, the Managing Director of the respondent), he cannot nominate another person as an Arbitrator. It observed that once the identity of the Managing Director as the sole Arbitrator was lost, the power to nominate someone else as an Arbitrator was also obliterated.

The High Court held that in addition to the grounds specifically mentioned in Section 12(5) read with the Seventh Schedule, including the ground of bias, the unilateral appointment of an Arbitrator by one of the parties itself is now also considered a disqualification by ineligibility. Thus, the High Court held that even a unilateral appointment of an Arbitrator, without any further allegation of bias, renders the Arbitrator ineligible.

The High Court noted that the decisions of the Supreme Court in TRF Limited and Perkins Eastman Architects DPC have addressed challenges under Section 11(6) of the Arbitration Act. This decisions allow court to annul appointments due to procedural failures or clear violations of arbitration clause fundamentals. Despite recognizing statutory disqualification, the High Court noted that these cases did not deliberate on whether such ineligibility fundamentally undermines the entire Arbitral Proceeding and award if not raised at any stage during the process.

Under Section 12(5) of the Arbitration Act, the High Court noted that the parties have the option to waive ineligibility post-dispute through written agreement. It held that this implies that such disqualification is not an absolute impediment. The bench held that this provision's inclusion of a waiver suggests that ineligibility does not inherently invalidate the jurisdiction assumed by the Arbitrator at the outset, nor does it nullify the subsequent award if waived appropriately.

The bench held that:

“…in view of the provision of waivability under the proviso to Section 12(5), the bar of ineligibility partakes of a character of not being an absolute bar which would hit at the root of the very assumption of jurisdiction at the inception, rendering the award a nullity.”

Therefore, the High Court held that despite the disqualification arising from unilateral appointment falling under Section 12(5), it does not rise to the level of an inherent lack of jurisdiction that would render the entire Arbitral Proceeding and consequential award null and void ab initio.

Consequently, the High Court dismissed the petition.

Case Title: Kotak Mahindra Bank Limited Vs Shalibhadra Cottrade Pvt. Ltd. And Ors.

Case Number: Execution Case No. 193 2019

Advocate for the Petitioner: Mr. Ritoban Sarkar, Adv. Ms. Shrayashee Das, Adv. Mr. Rohan Kumar Thakur, Adv. Mr. Paritosh Sinha, Adv.

Advocate for the Respondent: Mr. Reetobroto Kumar Mitra, Adv. Mr. Aditya Kanodia, Adv. Ms. Shreya Trivedi, Adv.

Date of Judgment: 02.07.2024

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