Unilateral Appointment Of Arbitrator ; Calcutta High Court Replaces With A New Arbitrator

The Calcutta High Court has held that an arbitration clause does not come to an end merely because it provides for an illegal method of appointment of arbitrator and the courts can remove the illegal portion and retain the remaining clause to give effect to the intention of the parties to submit their dispute to arbitration. The Bench of Justice Shekhar B. Saraf further held that the Court while exercising powers under Section 14 of the A&C Act for appointing a substitute arbitrator will be guided by the principles of Section 11 of the Act, therefore, the Court may refuse substitution when it finds that the issue itself is not arbitrable or falls under one of the categories wherein the dispute is not required to be sent for arbitration. Facts The parties entered into a loan agreement dated 29.08.2016 whereby the respondent disbursed the loan amount of Rs. 5,50,00,000/- to the petitioner. A dispute arose between the parties due to the alleged failure of the petitioner to repay the loan amount. Accordingly, the respondent issued the notice of arbitration and unilaterally appointed the sole arbitrator. Aggrieved by the unilateral appointment of the sole arbitrator, the petitioner challenged the appointment under Section 14 of the A&C Act. The arbitrator on learning of the fact of the challenge of his appointment, adjourned the arbitration sine die. The Contention of the Parties The petitioner challenged the appointment of arbitrator and nullification of the arbitration agreement on the following grounds: The sole arbitrator was unilaterally appointed by the respondent, therefore, he becomes de jure unable to perform his functions and his mandate stands terminated as provided under Section 14(1)(a) of the A&C Act.As the portion of the arbitration agreement that provides for unilateral appointment of arbitrator is ex-facie illegal and invalid as a necessary corollary the entire arbitration must fall and the court in absence of an agreement cannot appoint the arbitrator. The respondent has failed to produce the original copy of the loan agreement between the parties and has merely placed on record a copy of the agreement. Moreover, the loan agreement itself is forged and fabricated and the matter involves serious allegations of fraud and forgery, therefore, there should not be any substitution of arbitrator. The Court while substituting an arbitrator is also guided by Section 11 of the A&C Act, therefore, there cannot be any substitution when the original agreement is not on record and there are serious allegations of fraud regarding the existence of the agreement itself. The respondent countered the submissions of the petitioner on the following grounds: The unilateral appointment of arbitrator is not hit by the provisions of Section 12(5) as none of the grounds provided under the Seventh Schedule are attracted in the present matter. Even if the mandate of the arbitrator is terminated, he must be substituted with another arbitrator.Merely because the agreement provides for an illegal and invalid method of appointment of arbitrator, the same would not mean that the entire arbitration agreement becomes invalid. Analysis by the Court The Court held that the arbitrator in the present case was unilaterally appointed by the respondent, therefore, he becomes de jure unable to perform his functions and his mandated stands automatically terminated under Section 14 of the Act. However, the Court rejected the argument of the petitioner that the entire arbitration agreement becomes illegal or invalid when the procedure of appointment is illegal. The Court has that it has power to severe the illegal portions of the arbitration clause and retain the remaining arbitration clause. It held that what is important is the intention of the parties which must be given effect and a bare perusal of the arbitration clause it becomes evident that the parties had always intended to refer dispute to arbitration, therefore, the arbitration agreement survives the illegal portion. The Court also held that the Court while exercising powers under Section 14 of the A&C Act for appointing a substitute arbitrator will be guided by the principles of Section 11 of the Act, therefore, the Court may refuse substitution when it finds that the issue itself is not arbitrable or falls under one of the categories wherein the dispute is not required to be sent for arbitration. However, it rejected the objection of the petitioner regarding the fraud and forgery. The Court held that this argument of the petitioner is not well merited since it has not disputed receiving the loan amount also it has failed to bring on record any other document/agreement under which it has received the amount. Accordingly, the Court terminated the mandate of the arbitrator and substituted him with another arbitrator. Case Title: ...

Unilateral Appointment Of Arbitrator ; Calcutta High Court Replaces With A New Arbitrator

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