Unilateral Appointment Of Arbitrator By Party: Delhi High Cout Set Aside Arbitral Award As It Contravened Section 12(5) A&C And & 7th Schedule

“The Sole Arbitrator has been appointed by the respondent unilaterally. The same is clearly hit by the judgments of “Perkins Eastman Architects DPC” (supra) and “TRF Limited” (supra) As the appointment is barred u/s 12(5) read with the Seventh Schedule of the Arbitration and Conciliation Act, 1996 , the whole arbitration proceedings are non-est in law.”

Brief Facts:

This Petitioner approached the Delhi High Court and filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), to set aside an ex parte award, where the Sole Arbitrator awarded Rs. 6,05,46,413.80/- to the Respondent against the Petitioner. The Petitioner, contended that the Arbitrator's appointment was flawed from the outset.

The Petitioner requested a working capital limit from the Respondent. Following the sanction of the Facility Agreement and subsequent formal agreement execution, the Petitioner defaulted on payments, prompting the Respondent to recall the loan and demand recovery. The Respondent initiated arbitration proceedings under Section 21 of the Arbitration Act. Later, the Respondent unilaterally appointed Ms. Divya Raj, Adv. as Arbitrator, claiming efforts to notify the Petitioner.

Petitioner pointed out that despite a visit by the Petitioner's director to the Arbitrator's office, which was found locked, no further notices were received regarding proceedings. It argued against the unilateral appointment of the Arbitrator by the Respondent, highlighting procedural irregularities.

Observations by the High Court:

The High Court referred to the decision of the Supreme Court in TRF Limited & Anr. vs. Damodar Valley Corporation & Anr. [AIR 2017 SC 3889]. The Supreme Court noted the distinction between Clauses (c) and (d) of the agreement, emphasizing that Clause (d) provided for the appointment of a Sole Arbitrator by the Managing Director or his nominee. The Supreme Court further discussed the implications of Section 12(5) of the Arbitration and Conciliation Act, 1996, which renders certain individuals ineligible to act as arbitrators.

Further, the High Court referred to the Supreme Court judgment in “Perkins Eastman Architects DPC vs. HSCC (India) Ltd.” [(2020) 20 SCC 760], where it highlighted that the essence of the amendments brought by the Arbitration and Conciliation (Amendment) Act, 2015, emphasized that a person with an interest in the dispute should not have the power to appoint a sole arbitrator. Therefore, the High Court held that the unilateral appointment of the Sole Arbitrator by Respondent was non-est in law, as it contravened Section 12(5) read with the Seventh Schedule of the Arbitration Act.

Consequently, the High Court allowed the petition, setting aside the Award dated 17.05.2022, on the grounds of the invalid appointment of the Arbitrator.

Case Title: M/s Upper India Trading Co. Pvt. Ltd Vs M/s Hero Fincorp Ltd

Citation: 2024 LiveLaw (Del) 359

Case Number: O.M.P. (COMM) 399/2022.

Advocate for the Applicant: Mr. Jaswinder Singh, Adv.

Advocate for the Respondent: Mr. Aditya Prasad, Mr. Amit Kr. Sinha, Advs.

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