Calcutta High Court Criticizes The Approach Of Finance And Banking Companies Unilaterally Appointing The Arbitrator; Refuses To Enforce ‘Unilateral Appointment Award’

The bench of Justice Shekhar B. Saraf has held that an arbitration award passed by a unilaterally appointed arbitration is non-est and its enforcement would be refused under Section 36 of the A&C Act even if the award was not set aside under Section 34. It held that executing court also has the power to declare an ‘unilateral appointment award’ non-est in law, declare it to be a nullity and direct the parties to re-agitate their dispute before an independent and impartial arbitral tribunal.

The Court held that independence and impartiality of arbitrator is the hallmark of arbitration that has to be safeguarded by the Courts at all stages of arbitration, including the execution stage. It held that the lady of justice cannot turn a blind eye and allow the enforcement of an ‘unilateral appointment award’.

Facts

The parties entered into a Loan cum Hypothecation agreement dated 24.02.2020 wherein the petitioner provided the respondent with the financial assistance for the purchase of a vehicle. A dispute arose between the parties accordingly, the petitioner unilaterally appointed the arbitrator. The respondent did not participate in the arbitration proceedings and was proceeded ex-parte.

The arbitrator delivered an award dated 22.11.2021 in favour the petitioner. It was put to challenge under Section 34 of the A&C Act, however, the Court opined that the challenge may be time barred.

Thereafter, the petitioner approached the Court under Section 36 of the A&C Act for the enforcement of the award. The respondent argued against the enforcement of the award on the ground that the appointment of arbitrator was bad in law, consequently, the arbitral proceedings and the resultant arbitration award is also bad in law, therefore, it cannot be enforced under the law.

Analysis by the Court

Firstly, the Court discussed the law on the validity of the unilateral appointments of arbitrator. The Court referred to the decision of the Hon’ble Supreme Court in HRD Corporation v. GAIL^[1] wherein the Apex Court held that when a person directly falls under Schedule VII, ineligibility goes to the root of the appointment as per prohibition under Section 12(5) read with Schedule VII. Such person lacks inherent jurisdiction.

The Court also referred to the decision of the Apex Court in TRF Ltd v. Energo Engineering Projects^[2] and Perkins Eastman v. HSCC^[3] to hold that a person who himself is ineligible to be appointed as arbitrator cannot unilaterally appoint another as the sole arbitrator. It also relied on the judgment of the Apex Court in BBNL v. United Telecoms^[4] to hold that the waiver under Section 12(5) has to be by way of an express agreement.

It relied on several other judgments to hold that an arbitration award passed by a unilaterally appointed arbitrator is non-est in law and a nullity in the eyes of law.

The Court held that admittedly the arbitrator was unilaterally appointed by the petitioner. It held that the arbitration reference which itself has began with an illegal act has vitiated the entire arbitral proceedings and the resultant arbitration award as the proceedings before the arbitrator were void-ab-initio.

The Court held that an arbitration award passed by a unilaterally appointed arbitrator suffers from a permanent and inedible mark of bias and prejudice that cannot be washed away at any stage of the proceedings.

The Court then deprecated the practice adopted by banking and financial institutions unilaterally appointing the arbitrator. It refused to enforce an award passed by an arbitrator that was unilaterally appointed by the award holder.

The Court held that an arbitration award passed by a unilaterally appointed arbitration is non-est and its enforcement would be refused under Section 36 of the A&C Act even if the award was not set aside under Section 34. It held that executing court also has the power to declare an ‘unilateral appointment award’ non-est in law, declare it to be a nullity and direct the parties to re-agitate their dispute before an independent and impartial arbitral tribunal.

The Court held that independence and impartiality of arbitrator is the hallmark of arbitration that has to be safeguarded by the Courts at all stages of arbitration, including the execution stage. It held that the lady of justice cannot turn a blind eye and allow the enforcement of an ‘unilateral appointment award’.

Accordingly, the Court refused the enforcement, directed the parties to re-agitate their claims before a fresh and independent arbitral tribunal, thus, the Court appointed an independent arbitrator for the parties and directed the arbitrator to file its mandatory disclosure in terms of Section 12(1) of the Act.

Case Title: Cholamandalam Investment & Finance Company Ltd v. Amrapali Enterprises, EC 122 of 2022

Citation: 2023 LiveLaw (Cal) 67

Date: 14.03.2023

Counsel for the Petitioner: Mr. Pratip Mukherjee and Mr. Ranjit Singh

Counsel for the Respondent: Mr. Sariful Haque

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