Admitting Jurisdiction In The Pleading Enough For ‘ Express Agreement’ Under Section 12(5) Of The A&C Act: Calcutta High Court

Section 12(5) of the Arbitration and Conciliation Act, 1996 provides that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject-matter of the dispute falls under any of the categories specified in the Seventh Schedule, shall be ineligible to be appointed as an arbitrator. The proviso to Section 12(5) provides that the parties may, subsequent to the disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing.

The bench of Justice Moushumi Bhattacharya held that a party, which was aware of the position of law qua the invalidity of the unilateral appointment of arbitrator, if participates in the arbitral proceedings for a considerable period of time and obtain the benefit of the order of the tribunal cannot later turn around and challenge the appointment of the arbitrator.

The Court held that all unilateral appointment of arbitrator are not invalid per se unless the arbitrator’s relationship falls within the Seventh Schedule to the A&C Act.

The Court distinguished between an arbitration clause that permits unilateral appointment of arbitrator and a clause that provides for arbitration before some person in charge of one of the parties or right of that person to delegate his function to a third party. The Court held that only in the latter scenario the persona designata would not just himself be ineligible to act as an arbitrator but would also be precluded from appointing someone else on its behalf.

Facts

The parties entered into an agreement dated 24.03.2018. Clause 3 of the agreement was the arbitration clause and it conferred unilateral right of appointment of arbitrator on the respondent. A dispute arose between the parties, accordingly, the respondent invoked the arbitration notice and appointed the arbitrator vide letter dated 11.05.2019.

The arbitrator filed its disclosure on 12.05.2019. Thereafter, the petitioner filed its statement of defence and offered to provide security for disposal of the proceedings subject to consent by the respondent no. 1 for vacating of the injunction order dated 19.6.2019 (granted by the High Court under Section 9 of the Act). Subsequently, the arbitrator passed a consent order dated 15.07.2019 and directed the petitioner to provide the securities to the respondent.

In compliance of the consent order, the petitioner executed Registered Agreement to Mortgage dated 15.07.2019 along with a Memorandum of Entry in favour of the respondent. Thereafter, the petitioner filed an application dated 09.12.2019 under Section 16(3) wherein it admitted to the jurisdiction of the tribunal by specifically stating that “the jurisdiction of this Hon’ble Tribunal is limited to disputes that had risen either on or before 11.5.2019”.

Thereafter, the petitioner challenged the appointment of the arbitrator as being in teeth of Section 12(5) of the Act r/w entry 12 to the 7^th Schedule. The petitioner also challenged the order under Section 13 of the Act.

Contention of the Parties

The petitioner challenged the appointment of the arbitrator on the following grounds:

• The arbitrator was unilaterally appointed by the respondent, therefore, his appointment is void ab initio and he lacks inherent jurisdiction to decide the dispute between the parties.
• Mere participation in the arbitration proceedings would not translate into an express agreement to waive the applicability of Section 12(5) of the Act (reliance placed on Ellora Paper Mills Limited vs. State of Madhya Pradesh; (2022) 3 SCC 1).
• Agreement to waive of the applicability of Section 12(5) has to be express and in writing it cannot be inferred from the conduct of the parties (reliance placed on Bharat Broadband Network Ltd. Vs. United Telecoms Ltd.; (2019) 5 SCC 755).
• A person ineligible to be appointed as an arbitrator cannot also appoint a sole arbitrator (Perkins Eastman Architects DPC vs. HSCC (India) Limited; (2020) 20 SCC 760 and TRF Ltd. vs. Energo Engineering Projects Ltd.; (2017) 8 SCC 377).

The respondent raised following arguments against the maintainability and merit of the application:

• The petitioner has acquiesced its right to object to the appointment of arbitrator as it has participated in the arbitral proceedings for a considerable period of time.
• The petitioner has itself in its pleadings admitted to the jurisdiction of the arbitral tribunal which satisfy the requirement of ‘express agreement’ to waive the applicability of Section 12(5) of the Act.
• The petitioner has obtained a consent order from the tribunal and has acted on that order.
• The objection to the appointment is an afterthought to wriggle out of the arbitral proceedings.

Analysis by the Court

Express Agreement in Writing

The Court held that Section 12(5) nullifies any agreement made between the parties before the appointment of an arbitrator where the person appointed comes within any of the relationships and categories specified in the Seventh Schedule. The person appointed as an arbitrator shall be rendered ineligible if he or she falls within any of the categories under the Seventh Schedule. However, the proviso to the Section confers power on the parties, subsequent to the arising of the dispute, to waive the applicability of the Section.

The Court held that unlike the IBA Guidelines which does not permit waiver in relationship of arbitrator falling in certain categories, the A&C Act permits the parties to waive all such requirements by an express agreement in writing made after the dispute has arisen between the parties. This, in the opinion of the Court, reinforces the autonomy given to the parities to decide on the procedure of arbitration.

However, the Court held that the agreement cannot be inferred from words, conduct or unspoken understandings. The Court held that the agreement has to fulfil the benchmark of an express promise as defined under Section 9 of the Indian Contract Act. Also, the Court clarified that there is no requirement for both the parties to execute a formal agreement and the condition would stand satisfied when the party, other than the appointing party, admit to the jurisdiction to the arbitral tribunal.

The Court considered the factual scenario and held that the petitioner vide its pleadings has admitted to the jurisdiction to the arbitral tribunal. Moreover, it had obtained a consent order and has acted in pursuance of the same by executing a mortgage agreement and memorandum of entry in favour of respondent. It held as under:

“The above dates show that the petitioner’s participation in the Arbitration was not a one-off act or a mindless entry into the Arbitrator’s jurisdiction; the petitioners made a conscious and deliberate decision to stay on and live with the Arbitration Agreement and the arbitration proceedings from March, 2018 – February, 2020. The petitioners decided to slip out of the arbitration only in 2020 by filing four applications for challenging the appointment of the Arbitrator.”

Next, the Court took into account the fact that the petitioner was aware of the legal position regarding the unilateral appointment yet it continued to participate in the arbitration proceedings for a considerable period of time without any protest or demur.

The Court held that at the time of the execution of the agreement, the judgment of the Supreme Court in TRF Energo (supra) was already in force. Further, the judgment of the Apex Court in Bharat Braodband (Supra) was also delivered before the arbitrator was appointed. Moreover, the judgment in Perkins (Supra) was delivered before the petitioner admitted to the jurisdiction of the tribunal in its application under Section 16(3) of the Act. It held that the petitioner took an informed decision to continue its participation in the proceedings even after full knowledge of the implication of the decision of the Apex Court in the abovementioned cases.

Invalidity of Unilateral Appointment

The Court held that “All unilateral appointments of arbitrators cannot automatically be nullified on the application of section 12(5). The perceived disqualification must be assessed only on the mandate of section 12(5) which is within the guard-rails of the Seventh Schedule”

It held that “A distinction must be made on the obvious dissimilarity between an arbitrator being hit by any one or all of the conflicted relationships in the Seventh Schedule and an arbitrator being rendered ineligible simply by reason of being appointed by one of the parties to the dispute.”

The Court distinguished the Supreme Court decisions in TRF, Bharat Broadband and Jaipur Zila Parishad on the ground that these decisions considered an arbitration clause that provided for arbitration before the CMD/MD of one of the parties and did not consider a situation where the clause merely permits unilateral appointment of an impartial arbitrator.

The Court held as “The ratio of TRF, Bharat Broadband and Perkins is therefore essentially that of an arbitrator who becomes ineligible by a statutory bar and consequently renders himself ineligible to nominate someone else to act as the arbitrator. The logic is that a disqualified person cannot delegate his position to another as that would amount to arbitration by the disqualified arbitrator himself. Hence, once the MD loses his position/identity as a sole arbitrator, the MD’s right to nominate is automatically wiped out – TRF and Perkins”

It held that “Unilateral appointments being impermissible in law must be read to mean an unilateral appointment made by a person who himself is disqualified to act as an arbitrator under the Seventh Schedule and not each and every unilateral appointment made by one of the parties to the arbitration. Treating these situations as one and the same would amount to conflation of two different and distinct scenarios which is not what the Act mandates.”

The Court held that the a unilaterally appointed arbitrator would only become ineligible his relationship directly falls under the Seventh Schedule and not merely because he has been unilaterally appointed.

The Court further distinguished Perkins on the ground that there was no express agreement in that case. Also, the agreement was executed before the judgment in TRF was delivered, thus, the parties were not aware of the legal position and the implication that the judgment of the Supreme Court would have. Accordingly, the Court held that the judgment in Perkins is distinguishable on facts on the above counts.

The Court concluded that “After discussing the import of section 12(5) read with the proviso, this Court finds and accordingly holds that section 12(5) is not applicable to this case since the alleged disqualification does not breach any one or more of the conflict-protections in the Entries of the Seventh Schedule. Even if it is assumed that the Arbitrator became ineligible by reason of the Seventh Schedule, the petitioners waived such disqualification by their express writings, conduct and agreement as envisaged under the proviso to section 12(5) of the Act.”

Accordingly, the Court rejected the petition.

Case Title: McLeod Russel India Limited v. Aditya Birla Finance Limited, A.P. No. 106 of 2020

Case Citation: 2023 LiveLaw (Cal) 40

Date: 14.02.2022

Counsel for the Petitioner: Mr. Abhrajit Mitra, Sr. Adv. Mr. Jishnu Chowdhury, Adv. Mr. Rajarshi Dutta, Adv. Mr. Chayan Gupta, Adv. Mr. Reetoban Sarkar, Adv. Mr. Prasun Mukherjee, Adv. Mr. Deepak Agarwal, Adv.

Counsel for the Respondent: Dr. Abhishek Manu Singhvi, Sr. Adv. Mr. Ranjan Bachawat, Sr. Adv. Mr. Sanjeev Kumar, Adv. Mr. Rohit Das, Adv. Mr. Dwaipayan Basu Mullick, Adv. Ms. Suchismita Ghosh Chatterjee, Adv. Mr. Abhishek Kisku, Adv. Mr. Pranshu Paul, Adv. Mr. Anshul Sehgal, Adv. Mr. Subhankar Das, Adv. Mr. Nidhi Ram, Adv.

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