Statement Made Before The Arbitrator Withdrawing Objection To Unilateral Appointment Would Not Suffice 'Express Agreement' Required Under Section 12(5) Of The A&C Act: Delhi High Court

The bench of Justice Jyoti Singh reiterated that ineligibility of the arbitrator goes to the root of the matter and any award passed by an ineligible arbitrator is non-est as the proceedings before such an arbitrator are void ab initio.

Factual Overview

The Petitioner, a prominent player in the gaming and entertainment industry, and the Respondent, a Real Estate Group, entered into a lease agreement dated 01.08.2017. The essence of the agreement was the leasing of premises within Ambience Mall, Vasant Kunj, New Delhi, for the operation of an entertainment centre. However, due to financial hardships compounded by the unprecedented challenges posed by the COVID-19 pandemic, the Petitioner terminated the lease in 2020.

In response to the termination, the Respondent invoked the dispute resolution mechanism embedded in the agreement. This mechanism required the appointment of three arbitrators. The Respondent proposed a panel of arbitrators, but the Petitioner expressed reservations and communicated its intention to invoke Section 11(5) of the Arbitration Act to approach the Chief Justice for the appointment of an arbitrator.

Despite the Petitioner's objections, the Respondent proceeded to unilaterally appoint an Arbitrator. During one of the arbitration proceedings, the Petitioner made a statement regarding the withdrawal of its objections to the unilateral appointment. The Tribunal duly recorded this statement as part of the proceedings. However, subsequently, the Petitioner abstained from participating in the arbitral proceedings and did not file its statement of defence.

Despite petitioner's non-participation, the arbitrator proceeded to pass the impugned awards. Aggrieved thereby, the petitioner challenged it under Section 34 of the A&C Act.

Contention of the Parties

The petitioner challenged the award on the following grounds:

• That the appointment was unilateral and contrary to the principle of party autonomy, as emphasized in the Supreme Court's judgment in Perkins Eastman Architects DPC and Another v. HSCC (India) Limited.
• That the Respondent's unilateral appointment is not only a breach of contract but also contrary to established legal principles governing arbitration in India.
• That the award passed by the arbitrator are non est as due to the illegality of the appointment, the proceedings before the arbitrator were void ab initio.
• That any waiver of objection to the unilateral appointment must be by an express agreement in writing, as mandated by Section 12(5). Merely recording a withdrawal of objection during proceedings is insufficient to constitute a valid waiver.

The respondent made the following counter-arguments:

• That the Petitioner, by participating selectively in the arbitral proceedings after withdrawing its objection, had waived its right to challenge the appointment. They contended that the Petitioner's conduct amounted to a valid waiver under the proviso to Section 12(5) of the Act.
• That allowing the Petitioner to challenge the appointment at a late stage would be unfair and cause prejudice. They relied on the principle of estoppel, emphasizing that the Petitioner's actions implied mutual consent to the Arbitrator's appointment.
• That challenges related to the appointment's legality should not be entertained under Section 34 of the Act.

Analysis by the Court

The Court observed that the arbitration clause provided for appointment of the sole arbitrator from a narrow panel of 3 persons to be prepared by the respondent. It held that when an arbitrator is to be appointed from a panel prepared by one of the parties, it should prepare a broad-based panel. The Court held that such a narrow panel is invalid in view of the judgment of the Apex Court in Voestalpine.

Next, the Court dealt with the issue of unilateral appointment of the arbitrator. It held that when the petitioner had objected to the appointment of the proposed arbitrators, the proper course for the Respondents was to seek a Court appointment under Section 11(5) and (6) of the A&C Act, which they failed to follow.

The Court rejected the argument regarding waiver by the petitioner. It held that mere participation in the arbitral proceedings or a statement before the arbitrator cannot substitute the requirement of an express agreement in writing as required by Section 12(5) of the Act.

The Court clarified that awards rendered by an ineligible arbitrator are void. It cited judgments that highlighted the ineligibility going to the root of jurisdiction and emphasized that such awards cannot be enforced.

Accordingly, the Court set aside the award on ground of ineligibility of the arbitrator, reserving, the right of the parties to re-agitate their claims before another tribunal.

CASE TITLE: SMAAASH LEISURE LTD V. AMBIENCE COMMERCIAL DEVELOPERS PVT LTD, OMP(COMM) 180/2022

DATE: 18.12.2023

COUNSEL FOR THE PETITIONER: Dr. Amit George, Mr. Rishabh Dheer, Mr. Raya Durgam Bharat and Mr. Arkaneil Bhaumik, Advocates.

COUNSEL FOR THE RESPONDENT: Ms. Kittu Bajaj, Advocate.

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