When Earlier Appointment Of Arbitrator Is Defective, Court May Appoint New Arbitrator U/S 11 Of Arbitration Act: Telangana High Court

The Telangana High Court bench of Justice K. Lakshman has held that a substitute arbitrator must generally be appointed in the same mode and manner as the original arbitrator. When the appointment of an earlier arbitrator was done under a defective arbitration clause or an unlawful procedure was followed, in such cases a proper recourse is to seek appointment of a new arbitrator under section 11 of the Arbitration and Conciliation Act, 1996. Brief Facts: The present two applications have been filed by the Applicant against its former employees. The Employees were allotted shares under the ESOPS-13 scheme. As per clause 13 of the scheme, any employee who is intending to resign must offer his share to the trust at the exercise price plus 6 percent IRR. However, the Respondents sold their shares in contravention of the said clause which prompted the applicant to issue legal notices. Thereafter, an arbitration clause was also invoked and the arbitration proceedings were initiated. However, the proceedings were terminated by the sole arbitrator, Sri P.V.V. Gopala Krishna Murthy, on 09.02.2023, stating non-cooperation from the respondents and objections raised regarding his impartiality. Contentions: The Applicant submitted that the unilateral transfer of shares without offering them to the Trust violates the terms of the ESOPS-13 Scheme. The ESOPS-13 clause establishes pre emptive rights for the Trust, aimed at preventing dilution of ownership before the company's shares are listed on a recognized stock exchange. It was further submitted that the respondents' act of selling shares to third parties, without honouring the right of first refusal, undermines the core objective of the Scheme. It was further argued that after the appointment of the arbitrator, objections were raised by the Respondents and due to non cooperation and concerns raised over the impartiality of the Arbitrator the arbitration proceedings were terminated. As the core dispute remains unresolved, the Applicant seeks appointment of a substitute arbitrator under Section 11(6) of the Arbitration Act. Per contra, the Respondent submitted that there is no valid arbitration agreement for the reliefs claimed, as the Trust—being the beneficiary of the share transfer—is not a party to the arbitration clause. The Applicant's demand for share transfer lies outside the scope of the arbitration agreement and that the procedure under Section 15(2) for appointing a substitute arbitrator was not properly followed. Lastly, it was submitted that the arbitration application is not maintainable as the dispute involves transfer of shares to third parties not bound by the arbitration agreement. Following the termination of earlier proceedings, the Applicant ought to have issued a fresh notice invoking arbitration before approaching the Court. Observations: The court noted that the Supreme Court in SBI General Insurance Co. Ltd. v. Krish Spinning held that in light of the Supreme Court's observations in In Re: Interplay, the Court clarified that at the stage of appointing an arbitrator, the scope of inquiry is confined to a prima facie examination of the existence of an arbitration agreement. Therefore, the broader jurisdiction recognized in Vidya Drolia and NTPC v. SPML—allowing referral courts to reject ex facie non-arbitrable or frivolous disputes—cannot be said to continue post In Re: Interplay. It further observed that the respondents' claim that the dispute falls outside the scope of arbitration and involves third parties is a matter to be decided by the arbitrator. As for the argument that the Applicant should have proceeded under Section 15(2) instead of Section 11, it is not tenable. The court further held that while Section 15(2) allows appointment of a substitute arbitrator in the same manner as the original, this applies only where the initial appointment was valid. In cases involving a defective arbitration clause or flawed appointment procedure, a fresh appointment under Section 11 is justified. The present facts clearly warrant such recourse. Based on the above, the court held that as evident, Clause 15.14 permits unilateral appointment of an arbitrator, which the Supreme Court in Perkins Eastman Architects DPC v. HSCC (India) Ltd. held to be impermissible. Thus, the prior appointment made under this clause was invalid, regardless of the arbitrator's later withdrawal. It concluded that since the appointment was based on an unlawful procedure, the same cannot be used under Section 15(2) to appoint a substitute. However, the underlying intent to arbitrate remains intact. Therefore, considering Clause 15.14 and the existing disputes, it is appropriate for the Court to appoint a sole arbitrator under Section 11 of the Arbitration Act. Accordingly, the present applications were allowed. Case Title: M/S Shriram Life Insurance Company Ltd. vs ...

When Earlier Appointment Of Arbitrator Is Defective, Court May Appoint New Arbitrator U/S 11 Of Arbitration Act: Telangana High Court

Mohd Malik Chauhan

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