Party Is Entitled To Challenge Appointment Of Arbitrator In Violation Of Arbitration Act, At Any Stage: Madras High Court

The court remarked that even if the award debtor had participated in the arbitral proceedings or, after having knowledge of the appointment of the sole Arbitrator, had failed to challenge the said appointment in terms of Section 13, the same would not deprive him of the right to challenge the said appointment under Section 34 for violation of the provisions of Section 12(5) of the A&C Act.

The bench of Justice Krishnan Ramasamy held that when the very appointment of the Arbitrator unilaterally, is improper and impermissible by virtue of Section 12(5), the arbitration proceedings are liable to be vitiated from the stage of the appointment of the Arbitrator. Further, a decision by an authority having no jurisdiction is non est in law and its invalidity can be set up whenever it is sought to be acted upon.

The petitioner, P. Cheran, availed loan from the respondent, M/s Gemini Industries & Imaging Ltd, under an agreement executed between the parties. After a dispute arose between them, the respondent invoked the arbitration clause and an ex parte arbitral award was passed in its favour.

The petitioner, Cheran, challenged the arbitral award under Section 34 of the A&C Act before the Madras High Court. Cheran contended that in the absence of an express agreement in writing, as contemplated under the proviso to Section 12 (5), the unilateral appointment of the Arbitrator made by the respondent was null and void and consequently, any award passed by the said Arbitrator was liable to be set aside.

To this, the respondent, Gemini Industries, averred that since the petitioner had not resorted to the remedy available to it under Section 13 of challenging the appointment before the Arbitrator, it was not entitled to challenge the award under Section 34 on the said ground.

As per Section 12(5) of the A&C Act, 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 VII^th Schedule- shall be ineligible to be appointed as an arbitrator.

As per the proviso to Section 12(5), the parties may, subsequent to the disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing.

Perusing the Loan-Agreement, the court reckoned that in terms of the said agreement, the respondent had nominated the sole Arbitrator unilaterally without the consent of the petitioner.

“In terms of Schedule VII of the Act, if the Arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party or if the Arbitrator is a Manager, Director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration, shall be ineligible to be appointed as Arbitrator,” the court said.

The court added that in view of the Supreme Court’s decision in Perkins Eastman Architects DPC vs HSCC (India) Ltd, 2019 SCC OnLine SC 1517, the appointment of sole Arbitrator unilaterally by one of the parties would be ineligible by operation of law. Further, as per the Apex Court’s decision, when a person is ineligible to be appointed as Arbitrator, he is also ineligible to nominate any Arbitrator.

The bench thus concluded that the persons mentioned in Schedule VII of the A&C Act would be ineligible to be appointed as Arbitrator or to nominate any person as arbitrator.

Noting that there was no express agreement between the parties providing consent in writing for the unilateral appointment of the Arbitrator, the court held that the unilateral appointment made by the respondent was in violation of the provisions of Section 12(5).

While dismissing the argument raised by the respondent, the High Court held that even though, the petitioner had not challenged the unilateral appointment of the sole Arbitrator under Section 13, it would not take away his rights to challenge the same under Section 34.

“Even if there is any participation by the petitioner in the arbitral proceedings, they would still have the right to challenge the violation of the provisions of Section 12(5) of the Act under Section 34 of the Act,” the bench added.

While considering the proviso to Section 12(5), the court referred to the definition of ‘express and implied authority’ contained under Section 187 of the Contract Act. “A perusal of the above makes it clear that an authority is to be implied when it is inferred from the circumstances of the case and is said to be expressed when it is given by words spoken or written,” the court concluded.

The court thus ruled that, even if it was inferred that the authority was implied by the act of the petitioner in not raising any objection towards the unilateral appointment of the Arbitrator, the same cannot be taken as implied authority since the proviso to Section 12(5) insists that the ‘express agreement between the parties for providing consent for unilateral appointment, must be in writing’.

Therefore, if the consent is not in writing, no other inference can be drawn contrary to what is provided under the proviso to Section 12(5), the court said.

The bench added: “The endeavour of this Court is always to rectify the errors apparent on the decisions/orders/judgments of the authorities/Tribunals/lower Courts etc., at any stage of the matter in order to avoid miscarriage of justice. Once this Court finds irregularity or illegality in the orders/judgments of the lower authorities, while exercising inherent jurisdiction, this Court can very well set right the same.”

“Therefore, this Court is of the considered view that irrespective of the stage whether it is at the initial stage of the arbitral proceedings or at stage of the execution of the award, the appointment of the Arbitrator can be questioned, not particularly under Section 13 but also under Section 34 of the Act and the same can be rectified by this Court,” said the court.

While reiterating that any award passed in violation of the provisions of the A&C Act, would be against the public policy of India, the court allowed the petition and set aside the award.

Case Title: P. Cheran vs M/s Gemini Industries & Imaging Limited

Citation: 2023 LiveLaw (Mad) 127

Dated: 28.03.2023

Counsel for the Petitioner: M/s. S. Elambharathi

Counsel for the Respondent: Mr. B. Dhanraj

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