Calcutta High Court: Executing Courts have the Power to Declare an ‘Unilateral Appointment Award’ Non-Est in Law

Calcutta High Court: Executing Courts have the Power to Declare an ‘Unilateral Appointment Award’ Non-Est in Law

The Calcutta High Court by its single judge Justice Shekhar B. Saraf observed that Executing Court has the power to declare an ‘unilateral appointment award’ non-est in law, declare it to be a nullity and can direct the parties to re-agitate their dispute before an independent and impartial arbitral tribunal.

In the case at hand, the parties entered into a Loan cum Hypothecation agreement dated 24.02.2020 wherein the petitioner provided the respondent with the financial assistance for the purchase of a vehicle.

A dispute arose between the parties accordingly, the petitioner unilaterally appointed the arbitrator. The respondent did not participate in the arbitration proceedings and was proceeded ex-parte.

On 22 November, 2021 the arbitrator delivered an award in favor the petitioner. The impugned award was challenged under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the City Civil Court the however, the Court held noted the challenge may be time barred.

Thereafter, the petitioner approached the Court under Section 36 of the A&C Act for the enforcement of the award.

The respondent argued against the enforcement of the award on the ground that the appointment of arbitrator was bad in law, consequently, the arbitral proceedings and the resultant arbitration award is also bad in law, therefore, it cannot be enforced under the law.

The Court at the outset remarked that the position of law on unilateral appointment of an arbitrator is no more res integra and has been settled by the Supreme Court through various judicial pronouncements.

After referring to a catena of judgements, the Court opined that the proscription under Section 12(5) read with Schedule VII of the A&C Act was extended to persons unilaterally appointed to act as an arbitrator. Such persons who are unilaterally appointed lack inherent jurisdiction unless an express written approval is given by the parties subsequent to disputes having arisen.

Applying the aforesaid principle, the Court held that he unilateral appointment of Mr. Soma Kar Ghosh by the award holder was illegal and void.

The Court was of the view that the impugned award was unsustainable and non-est in the eyes of law. It is a settled principle of law that compliance with Section 12(5) read with Schedule VII is sine qua non for any arbitral reference to gain recognition and validity before the Courts.

In the present facts in hand, an arbitral reference which itself began with an illegal act had vitiated the entire arbitral proceedings from its inception and the same cannot be validated at any later stage. Thus, it would be a logical inference to consider the aforesaid arbitral proceedings as void ab initio, stated the judge.

The Court stated, “infact, as the arbitrator was dejure ineligible to perform his functions and therefore lacked inherent jurisdiction or competence to adjudicate the disputes in hand, the impugned award cannot be accorded the privileged status of an award.”

Further, it was pertinent to note the arbitration application before the Court was not under Section 34 but rather an execution petition under Section 36.

The Court after examining various judgments regarding the jurisprudence with respect to decrees passed by bodies lacking inherent jurisdiction, observed, principles must be applied in cases of awards passed by arbitral tribunals lacking inherent jurisdiction.

“The court cannot shut its eyes to the grave irregularity that will occur if it does not interfere. As outlined in various afore-stated judicial pronouncements, an arbitral award passed by a unilaterally appointed arbitrator cannot be considered as an award under the provisions of the Act and consequently, they have to be regarded as non-est in the eyes of law,” Court remarked.

Noting the peculiar situation, the Court held that the jurisprudence and statute (Section 12[5] read with Schedule VII) ascertains selected arbitrators to inherently lack jurisdiction. But such jurisdiction can be sanctified/legalised, if express waiver is made by a written agreement, as statutorily carved out owing to considerations of party autonomy. Possibility of waiver was granted as a concession to party autonomy in arbitration law.

However, the Court asserted, that does not mean that the jurisdiction is not inherently lacking before such express waiver is made. As a flip side to this, such waivers should be very strictly construed in terms of its explicitness.

The Court held that even if an award is not set side under the procedure established in section 34 of the Act, the Courts, at the stage of execution can step in and declare a ‘unilateral appointment award’ as non-est in law, declare the same as a nullity and direct parties to re-agitate their issues before a new arbitral tribunal constituted in accordance with law.

The judge highlighted that this judgement is applicable to awards wherein the arbitral proceeding commenced post the 2015 amendment to the Act. It does not deal with proceedings having been initiated pre the 2015 amendment and concluding post the 2015 amendment.

Lastly, the Court expressed its displeasure noting the practice of banking and financial institutions unilaterally appointing the arbitrator.

In this regard, the Judge commented, “the raison d'être of arbitration is to provide liberty to parties wherein they can decide upon various facets of dispute resolution. Ergo, party autonomy is sine qua non of the law of arbitration. However, a virus had emerged wherein finance companies and banks were facilitating appointment of a small cabal of arbitrators in hundreds of cases for themselves. The awards passed were soiled and tainted with bias.”

Accordingly, the Court refused the enforcement, directed the parties to re-agitate their claims before a fresh and independent arbitral tribunal, thus, the Court appointed an independent arbitrator for the parties and directed the arbitrator to file its mandatory disclosure in terms of Section 12(1) of the Act.