Appointment Of Arbitrator In Violation Of S. 12(5) Of A&C Act Is Void, Waiver Of This Provision Requires Explicit Written Agreement: Kerala High Court

Section 12(5) provides that any person having a relationship with the parties, counsel, or subject matter of the dispute falling under the categories specified in the Seventh Schedule is ineligible to be appointed as an arbitrator.

The court held that an appointment of the arbitrator in violation of Section 12(5) of the Arbitration Act itself is void ab initio and neither estoppel nor waiver given under any law applies against the party contesting the appointment.

Brief Facts:

The matter pertained to an agreement executed between Groupl Services Pvt. Ltd. (“Petitioner”) and Kerala Academy for Skills Excellence (“Respondent No. 2”), a Government of Kerala undertaking. The Petitioner was tasked with establishing a Centre of Excellence in Security Sector (“CEIS”) to provide employability skills to personnel in the security sector. Despite initiating work to establish CEIS, disagreements surfaced between the Petitioner and the Respondent No. 2. This eventually resulted in Respondent No. 2 sending a termination notice and making a demand payment of Rs. 55,57,475.36 for rent, maintenance, and property tax from the Petitioner.

In response, the Petitioner denied liability for the demanded amount and requested release from the project and contract, alongside compensation for investments made and return of the bank guarantee. Subsequently, the Respondent No. 2 referred the dispute to arbitration as per Clause 37(2) of the agreement. The Government of Kerala appointed Dr Sunil Vsudevan (“Respondent No. 1”) as the sole Arbitrator to resolve the dispute between the Petitioner and the Respondent No. 2.

Feeling aggrieved, the Petitioner approached the Kerala High Court (“High Court”) under Section 14(2) read with Section 12(5) of the Arbitration and Conciliation Act (“Arbitration Act”) to challenge the appointment of the arbitrator. It alleged biased conduct by the sole arbitrator, claiming unfair treatment and favouritism towards the Respondent No. 1. Further, it argued that there was a conflict of interest. It contended that the government, being the 100% shareholder of the Respondent No. 2, had an interest in the dispute.

In response, the Respondent No. 2 argued that the Petitioner waived its right to challenge the appointment of the sole arbitrator by participating in the arbitration proceedings and submitting its defence statement and counterclaim.

Section 12(5) of the Arbitration Act is as follows:

“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:

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.”

Observations by the High Court:

The High Court rejected the argument made by the Respondent No. 2 and held that the exemption for the applicability of Section 12(5) of the Arbitration Act through waiver requires an express agreement in writing between the parties. Additionally, the High Court held that neither estoppel nor acquiescence can be invoked as given under any law when the appointment of the arbitrator itself is void ab initio.

Furthermore, the Respondent No. 2 objected to the applicability of Section 14(2) of the Arbitration Act to the High Court, contending that the High Court did not fall under the definition of "Court" as envisaged under Section 2(1)(e) of the Arbitration Act. However, the High Court dismissed this objection and held that there must be a contextual interpretation of the term "Court" under various provisions of the Arbitration Act. The High Court held that while interpreting the term "Court", it is imperative to consider the powers conferred on the Court under Section 29A, particularly under sub-sections (4) and (5), which are akin to the powers given to the Supreme Court and the High Court under Sections 11(6), 14, and 15 of the Arbitration Act.

Therefore, the High Court held that the appointment of the arbitrator was invalid and contravened the provisions of the Arbitration Act. Consequently, the High Court nominated Mr P. Muraleedharan, a retired District Judge, as the sole arbitrator to arbitrate upon the disputes between the Petitioner and the Respondent No. 2.

Citation: 2024 LiveLaw Ker 262

Case Title: Groupl Services Private Limited vs Dr. Sunil Vsudevan and Anr.

Case Number: ARB.P. NO. 5 OF 2023

Advocate for the Petitioner: P. Martin Jose; Thomas P. Kuruvilla P. Prijith; R. Githesh; Ajay Ben Jose Manjunath Menon and Harikrishnan S. S. Sreekumar (Sr.).

Advocate for the Respondent: Pradeep Joy; Anjaly Ann Josep and Dharmya M.S.

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