Calcutta High Court: All Unilateral Appointments of Arbitrators Cannot Automatically be Nullified

Calcutta High Court: All Unilateral Appointments of Arbitrators Cannot Automatically be Nullified

The Calcutta High Court observed that all unilateral appointments of arbitrators cannot automatically be nullified on the application of section 12(5) of the Arbitration and Conciliation Act (in short 'the Act'). The perceived disqualification must be assessed only on the mandate of section 12(5) which is within the guard-rails of the Seventh Schedule of the Act.

The single judge Justice Moushumi Bhattacharya 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.

The brief facts of the case are that the petitioners- McLeod Russel India Limited & Anr. filed an application against the respondents Aditya Birla Finance Limited & Ors. under section 14 of the Act, for termination of the mandate of the Ld. Sole Arbitrator and stay of all further proceedings in the arbitration pending disposal of the present application.

The parties entered into an agreement dated 24th March 2018. Clause 3 of the agreement was the arbitration clause and it conferred a 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 11th May, 2019.

The arbitrator filed its disclosure on 12th May, 2019. Thereafter, the petitioner filed its statement of defense 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 19th June 2019 (granted by the High Court under Section 9 of the Act). Subsequently, the arbitrator passed a consent order dated 15th July, 2019 and directed the petitioner to provide the securities to the respondent.

The petitioner complied with the consent order and executed Registered Agreement to Mortgage dated 15th July, 2019 along with a Memorandum of Entry in favor of the respondent. Afterwards, the petitioner filed an application dated 9th December, 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 11th May, 2019."

Consequently, the petitioner challenged the appointment of the arbitrator as being in teeth of Section 12(5) of the Act read with entry 12 to the Seventh Schedule. The petitioner also challenged the order under Section 13 of the Act.

The controversy was whether the Arbitrator has become de jure or de facto unable to perform his functions by reason of the statutory bar under section 12(5) of the Act.

Analysis by the Court

1. Waiving the Disqualification-Section 12(5)

Next the Court dealt with Waiving the Disqualification Section 12(5). The Court observed, 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. In the present case the Court found that the pleadings filed by the petitioners at various stages in the arbitration proceeding waived the perceived disqualification of the Arbitrator under section 12(5) by an express agreement in writing as contemplated in the proviso to section 12(5) of the Act.

2. Express Agreement in writing

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. After considering the factual scenario, it 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 favor of respondent.

The Court observed, "Section 12(5) is a relationships-conflict provision. The disqualification of an arbitrator is premised on the intersections of the arbitrator's relationship with the parties/counsel/subject matter of the dispute which falls under any of the categories specified in the Seventh Schedule…. Since the Act gives the right to the parties to circumvent any and all relationship-based conflicts which would disqualify an arbitrator under the Seventh Schedule, no appointments can be treated as void ab initio or incapable of being cured by an express written agreement."

The Court opined that the de jure or de facto termination of mandate of an arbitrator under section 14 must not only be assessed in light of the proviso to section 12(5) but also with reference to the express agreement entered into between the parties subsequent to the dispute having arisen between the parties.

3. Invalidity of Unilateral Appointment

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. It observed, "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 took into account the fact that the petitioner's participation was with full knowledge of the Supreme Court judgments in TRF Limited, Bharat Broadband and Perkins and 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 felt the need to lay the distinguishment between the decisions passed by the Supreme Court 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. It stated that the ratio of TRF, Bharat Broadband and Perkins was therefore, essentially that of an arbitrator who becomes ineligible by a statutory bar and consequently renders 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.

The Court noted that the Arbitrator in the present case does not fall under any of the prohibited relationships/categories in the Seventh Schedule including Entry 12 therein.

Thus, in conclusion the Court held that Section 12(5) was 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.

Therefore, the Court stated no material was disclosed in the petition for terminating the mandate of the Arbitrator and the law does not support the petitioners' case either, hence the petition was liable to be dismissed.