Unilateral Appointment of Arbitrator as a Ground for Setting Aside of Arbitral Award: Muddying the Waters Arjun Mall Retail Holdings (P) Ltd. v. Gunocen Inc.: A case comment

Introduction

The Indian jurisprudence on arbitration has come a long way since the commencement of the Arbitration and Conciliation Act, 1996¹ (the Act). Over the last 9 years, the legislature has taken proactive steps in developing India as an arbitration hub. Hallmarks such as independence and impartiality, and a fair and binding award have led to arbitration being considered the preferred mode of dispute resolution. Although the Act was based on the UNCITRAL Model Law on International Commercial Arbitration, 1985², there existed many problems with the arbitration regime such as the lack of provisions on time-bound arbitrations and provisions for automatic stay on challenge of the award, which undermined the benefits that arbitration provided vis-à-vis litigation. Being cognizant of these issues, the legislature amended the Act in 2015³ with a view to bring much-needed reforms. The 2015 Amendment, an instrumental step in the right direction, largely sought to do away with the existing problems in the Act.

One of the major reforms was the inclusion of Section 12(5)⁴ read with the Seventh Schedule which sought to curtail arbitration proceedings where a sole arbitrator was unilaterally appointed by one party under the arbitration agreement. It is relevant to mention that prior to 2015, an archetypal agreement between a private party and largely all governmental agencies/companies, private banks, and real estate companies would include a dispute resolution clause which permitted only them to have the power to unilaterally appoint a sole arbitrator. Needless to say, such appointments raised questions on the hallmarks of independence and impartiality of the arbitrator. However, with the inclusion of Section 12(5), these organisations were required to obtain an “express agreement in writing” from the private party to confirm the unilateral appointment of the sole arbitrator. Non-compliance with Section 12(5) renders the sole arbitrator ineligible to adjudicate the dispute. Consequently, any award passed by the sole arbitrator would also be unenforceable. In fact, the Supreme Court of India, while deciding on the issue, has observed that a party “who has an interest in the outcome or decision of the dispute must not have the power to appoint sole arbitrator”.

Against this backdrop, it is relevant to discuss the decision passed by a Division Bench of the Delhi High Court in Arjun Mall Retail Holdings (P) Ltd. v. Gunocen Inc.⁵ While deciding an appeal under Section 37⁶ of the Act, the Court upheld an award passed by a unilaterally appointed sole arbitrator on the ground that the appellant failed to challenge the appointment of the arbitrator under Section 11(6)⁷ of the 1996 Act, take recourse in law to challenge the arbitration clause itself and further failed to participate in the arbitration proceedings despite having knowledge of the same. The Court further held that the courts could only interfere if there was any patent illegality in the award.

Interestingly, neither the lawyers nor the Court delved into the issue of unilateral appointment and the lack of any “express agreement in writing” as mandated under Section 12(5) of the Act (as amended). By not considering the issue of unilateral appointment, the Court appears to have implicitly endorsed the award, which would otherwise be unsustainable and unenforceable.

Part II of the article provides a brief background leading to the challenge made before the Court. Part III critically analyses the decision passed by the Court in light of the settled legal position. Part IV concludes the article with key observations.

Facts of the case

Succinctly, the appellant and the respondent had entered into a Memorandum of Understanding (MoU) whereby the respondent would provide financial assistance to the appellant, for it to complete and run a hotel. In return, the appellant along with the financial amount invested in the project would provide a minimum guaranteed sum every month to the respondent. However, shortly thereafter, the appellant began to default on its obligations under the MoU, which eventually led to the respondent invoking the arbitration clause in the MoU which read as follows:

Legal jurisdiction and arbitration

(i) If any question of difference or claim or dispute arises between the parties hereto arising out of this agreement as to the rights, duties, or obligations of the parties hereto or as to any matter arising out of or connected with the subject-matter of this agreement, the same shall be referred to the arbitration. The reference shall be to the sole arbitrator appointed by the second party i.e. Gunocean Inc. and the decision of the arbitrator shall be final and binding in accordance with the provisions of the Arbitration and Conciliation Act, 1996 or any other law relating to any statutory modification or re-enactment thereof shall be binding on the parties.

In terms of the abovementioned arbitration clause, the respondent unilaterally appointed the sole arbitrator. The appellant had thereafter by means of a letter to the sole arbitrator stated that it had not consented to the appointment of the arbitrator and that he should not decide the dispute. However, the arbitrator, simply held that, “Since I had already entered into the reference indicated above, the arbitration proceedings commenced by me cannot be terminated at the stage as requested by the respondents”. Thereafter, the appellants did not participate in the arbitration proceedings and the proceedings proceeded ex parte. Subsequently, the arbitrator passed an award in favour of the respondent.

The said award came to be challenged by the appellant before the Commercial Judge under Section 34⁸ of the Act on the ground inter alia that the arbitrator failed to decide on the challenge. The Commercial Judge held that since the said ground was not raised in the arbitral proceedings, the appellant cannot take fresh grounds before the appellate authority, and any such plea, deserves to be rejected.

The said reasoning was upheld by the High Court by holding that there was a significant time gap between the date of issuance of legal notice of invocation of arbitration proceedings and its actual commencement and that during this time the appellant did not take any recourse in law for revocation of appointment of the arbitrator or challenge the arbitration clause. The Court further went on the conclude that under Section 34 of the Act, the scope of interference by the Court is limited to the extent that the award is not vitiated on the basis of pleadings raised by the parties. The Court further went on to hold that even if it is accepted that the appellant raised an objection to the appointment of the arbitrator, the said challenge was not made under Section 11(6) of the Act and further failed to participate in the arbitration proceedings despite having knowledge of the same. The Court concluded that the appellant instead of contesting the respondent’s claim remained a mute spectator and only after losing in the arbitral proceedings, challenged the appointment of the arbitrator under Section 34 of the Act, which is not tenable.

Authors’ analysis

The authors humbly opine that despite the appellant not having made any submissions on the issue of unilateral appointment by the respondent, the Court ought to have considered the impact of the dispute resolution clause which permitted the respondent to unilaterally appoint a sole arbitrator. The legal position regarding unilateral appointments has been settled in a catena of cases passed by the Supreme Court like TRF Ltd. v. Energo Engg. Projects Ltd.⁹, Bharat Broadband Network Ltd. v. United Telecoms Ltd.¹⁰, Perkins Eastman Architects DPC v. HSCC (India) Ltd.¹¹, Jaipur Zila Dugdh Utpadak Sahkari Sangh Ltd. v. Ajay Sales and Suppliers¹² and Ellora Paper Mills Ltd. v. State of M.P.¹³, whereby the unilaterally appointed arbitrators were held to be ineligible to adjudicate the disputes between the parties. The Supreme Court has categorically held that Section 12(5) not only should be contrasted from Section 4¹⁴, which permits for deemed waiver by conduct, but also overrides Section 4 of the Act. In fact, the Supreme Court in Ellora Paper Mills case¹⁵ has even held that arbitrators unilaterally appointed prior to the 2015 Amendment shall become ineligible to continue as an arbitrator post 23-10-2015 i.e. the date when the 2015 Amendment came into force.

In the present facts of the dispute, it appears from the decision that there was no discussion on whether any “express agreement in writing” was obtained from the appellant before the commencement of arbitration. Further, the appellant had rightly issued a letter stating that they had not consented to the appointment of the sole arbitrator and further rightly decided to decline participation in the arbitration proceedings. Having not obtained any “express agreement in writing” from the appellant, the sole arbitrator became ineligible to adjudicate the disputes that had arisen between the parties, resulting in the award being unenforceable. The mere fact that the appellant did not contest the appointment under Section 11(6) does not cure the inherent defect of not having obtained a waiver under Section 12(5) of the Act (as amended). This view has been affirmed by two Division Benches of the Delhi High Court in Ram Kumar v. Shriram Transport Finance Co. Ltd.¹⁶ and Govind Singh v. Satya Group (P) Ltd.¹⁷ In both the said cases, while hearing a challenge to an award passed by a unilaterally appointed arbitrator, the Delhi High Court held that an award rendered by a person ineligible to act as an arbitrator cannot be considered an arbitral award under the provisions of the Act.

Conclusion

The judgment of the High Court queers the pitch vis-à-vis the settled position of law that the unilateral appointment of an arbitrator is a valid ground for setting aside an arbitral award under Section 34 of the Act. A consequence of India following the common law system is that one stray decision could lead to disturbing settled waters and opening a Pandora’s box. It is the sanguine hope of the authors that in the event the present judgment does not travel to the Supreme Court of India on appeal, the Delhi High Court will hold the same to be per incuriam in any subsequent judgments passed by it on similar facts. Perhaps it is apposite to mention that the Delhi High Court could employ the “unusual liberty” taken by G.S. Patel, J. of the Bombay High Court in Hindustan Organic Chemicals Ltd. v. ICI India Ltd.¹⁸ when he had suo motu reviewed his own judgment after realising that his order was per incuriam.