Bombay High Court rules a party can challenge an order even after engaging in arbitral proceedings

Bombay High Court rules a party can challenge an order even after engaging in arbitral proceedings

Terms the award passed by the arbitrator as violative of the principles of natural justice

The Bombay High Court has ruled that merely because a party participated in the arbitration proceedings, it cannot be disentitled from challenging the arbitral award. It was because arbitration proceedings were vitiated due to the unilateral appointment of the arbitrator by the opposite party.

The bench of Justice Manish Pitale held that it could be waived under the Arbitration and Conciliation (A&C), Act, 1996. In the absence of framing issues by the tribunal and consideration of the stand taken by a party, granting an opportunity to the party to lead evidence is of no significance. Thus, the award passed by the arbitrator violated the principles of natural justice.

A home loan agreement was executed between Kotak Mahindra Bank Limited (respondent), and Naresh Kanayalal Rajwani and others (petitioners). After disputes arose between the parties, the bank invoked the arbitration clause and unilaterally appointed an arbitrator.

The petitioners raised a preliminary objection before the tribunal disputing the maintainability of the arbitration proceedings, which the arbitrator rejected. Subsequently, the latter passed an award in favor of the respondent, against which the petitioners approached the high court.

The petitioners submitted that since the arbitrator was unilaterally appointed, the entire arbitral proceedings stood vitiated. They added that the issues were not framed during the arbitral proceedings and proper opportunity was not granted to them to furnish the evidence. They added that the appointment of the arbitrator was hit by the A&C Act. Thus, the arbitral award must be set aside.

A&C Act provides that notwithstanding any prior agreement to the contrary, if any person, whose relationship with the parties, counsel, or the subject matter of the dispute, falls under any of the categories, he will be ineligible to appoint an arbitrator. However, it provides that after the disputes, the parties could waive the applicability of Section 12(5) by an express written agreement.

However, the bank averred that the petitioner never raised an objection before the arbitrator that it was ineligible to appoint an arbitrator. It argued that under the A&C Act, since the petitioners had participated in the arbitration proceedings without raising an objection, they had waived their right to raise an objection.

The bank contended that since the agreement was executed between the parties in 2006, and the A&C Act was inserted vide the Arbitration and Conciliation (Amendment) Act, 2015, the provisions of Section 12(5) were not applicable. It maintained that the same was not raised in the petition, therefore, the court must not rule on that basis.

The bench noted that the arbitral award was challenged by the petitioners before the court on the ground that it was perverse and against the settled provisions of the law and public policy. Even though the contention appeared to be general, it would cover the specific ground raised under the A&C Act. Therefore, the objection raised was a pure question of law.

While perusing the arbitration clause, the court considered that only the respondent had the authority to appoint a sole arbitrator for resolving the disputes between the parties.

The bench noted that the A&C Act operated 'notwithstanding any prior agreement to the contrary.' Therefore, even if any agreement executed prior to the introduction of the amended Act provided the appointment of an arbitrator, it would be against the law.

Justice Pitale stated, "A proper application of Section 12(5) of the Act is a complete answer to the contentions raised by the respondent. There is no substance in the contention that Section 12(5) read with Seventh Schedule as amended with effect from 23 October 2015, would not apply merely because the agreement between the parties was executed in 2006. The non-obstante clause, with which Section 12(5) begins, destroys the very basis of the submission made by the respondent bank."

It added, "The arbitration clause gave power and authority to the respondent to unilaterally appoint the arbitrator. In the present case, the arbitrator was appointed unilaterally by the bank, which was clearly in the teeth of the position of law clarified by the Supreme Court in the context of Section 12(5) of the said Act, read with the Seventh Schedule thereof."

The court said the arbitrator failed to frame the issues to afford an opportunity to the parties to lead evidence and it extended its mandate twice.

The bank responded that the minutes of the meeting recorded by the arbitrator specifically stated that sufficient opportunities were granted to the petitioners to lead evidence. But they failed to provide it.

However, rejecting the contention of the bank, the court ruled that in absence of framing the issues by the tribunal and the stand taken by the petitioners, granting an opportunity to the petitioners to provide evidence, was not significant. Thus, it allowed the petition and set aside the award.