Restating the Principle: Enforceability of an Award Rendered by an Ineligible Arbitrator
Sayyam Jain
(3rd Year Law Student at the Institute of Law, Nirma University)
Introduction
The Delhi High Court by its order dated 17 May 2023 in the Kotak Mahindra Bank Ltd. v. Narendra Kumar Prajapat,[1] had reiterated the set principle laid down by the Supreme Court in HRD Corporation v. GAIL (India) Ltd.,[2] that an award passed by an arbitrator who is ineligible to be appointed, as an arbitrator in the matter makes any award passed by him as null and void.
Factual Background of the Case
The Present matter revolves around the ex-parte award passed by the Sole Arbitrator dated 21.07.2021 in favour of D.H. Finance Company of Rs. 4,66,103.3/- along with interest @ 18% per annum. As the award was assigned by DH Finance to Kotak Mahindra Bank Limited. Therefore, to enforce the same the appellant (i.e., Kotak Mahindra Bank) consequently, filed for the enforcement of the arbitral award passed by the Sole Arbitrator in favour of D.H. Finance Company before the Commercial Court. To this application, the Commercial Court observed that the Arbitral Award that was passed is ex-parte by an arbitrator who was unilaterally appointed by D.H. Finance Company without any recourse or consent of the respondent. In furtherance to the same, the Court found out that the learned arbitrator was also ineligible for being appointed as an arbitrator as per Section 12(5) of the Arbitration and Conciliation Act, 1996 (“Act”). Based on these points the court held that an award rendered by a person who is ineligible to act as an arbitrator is a nullity and thus could not be enforced. Aggrieved by the order passed by the Commercial Court the appellant had filed the present application before the Delhi High Cout.
Stand of the Court
Kotak Mahindra Bank had contended that the arbitrator’s appointment was not ineligible, given that the respondent was aware of the appointment and did not raise objections. The Court, however, pointed out that a party’s right to object to an arbitrator’s ineligibility under Section 12(5) of the Act can only be waived through an express written agreement, which must be executed after the dispute arises. The Court cited Bharat Broadband Network Limited v. United Telecoms Limited,[3] wherein the Supreme Court held that such waiver cannot be inferred from a party’s conduct but necessitates a clear written agreement.
The Court then addressed whether an award rendered by an ineligible arbitrator could be enforced. The Court drew from HRD Corporation v. GAIL (India) Ltd., where the Supreme Court had established that ineligibility acts as a fatal flaw to the appointment under Section 12(5) of the Act read in conjunction with the seventh schedule. An arbitrator falling within the categories outlined in the Seventh Schedule is inherently “ineligible” to act as an arbitrator. This ineligibility, as per Section 14(1)(a) of the Act, renders the arbitrator incapable of performing their duties from the outset.
The Court also referenced Govind Singh v. Satya Group Pvt. Ltd.,[4] wherein it was affirmed that an arbitral award by an ineligible arbitrator lacks jurisdiction and is thus invalid. Based on this legal foundation, the Court concurred with the Commercial Court’s stance that an award from an arbitrator ineligible under Section 12(5) of the Act is void and cannot be enforced.
Analysis of the Case
The Kotak Mahindra Bank Ltd. v. Narendra Kumar Prajapat case presents a nuanced interpretation of the principles surrounding arbitrator eligibility and the enforceability of arbitral awards. The case sheds light on critical aspects of arbitration law in India and contributes to the ongoing discourse on the fairness and integrity of the arbitration process. One of the noteworthy outcomes of this case is the elucidation of the conditions under which objections to arbitrator eligibility can be waived.
The Delhi High Court’s assertion that an express written agreement is required post-dispute to waive objections reinforces the importance of transparency and forethought in arbitrator appointments. This ensures that parties consciously and unequivocally waive their right to object, enhancing the integrity of the arbitration process. The judgment reiterates the fundamental principle that an ineligible arbitrator lacks the inherent jurisdiction to render an award. This is consistent with international arbitration practices, where maintaining the integrity of the arbitration process is paramount.
By affirming that ineligibility is a “diseased seed” that taints the entire appointment process and makes the award void, the Court underscores the significance of adhering to strict eligibility criteria. The case also underscores the importance of preventing unilateral arbitrator appointments. As the practice of unilaterally appointing arbitrators has garnered attention in various jurisdictions, prompting legal considerations and reforms to ensure fairness and impartiality in the arbitration process. This concept gained notable recognition in France in 1992 through the landmark case of Siemens AG & BKMI Industrienlagen GmbH v. Dutco Consortium Construction Co.,[5] as ruled by the French Supreme Court. The principle of party equality in arbitrator selection was deemed a matter of public policy, emphasizing the need for balanced participation in the appointment process.
A similar principle emerged in the United States through the case of Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc.[6] The court emphasized the importance of impartiality in arbitrator selection, particularly when arbitrators are not designated by an impartial entity like the American Arbitration Association (AAA). This case underscored the requirement for both parties to have equal rights in engaging with the arbitrator appointment procedure, ensuring fairness and integrity.
This discouragement of one-sided appointments resonates with the broader objective of ensuring unbiased arbitration proceedings. The Court’s stance aligns with the intention of the Arbitration and Conciliation Act, 1996, which seeks to foster fairness and impartiality in arbitrator selection and attempts to harmonise India’s position with those of other nations regarding the unilateral appointment of arbitrators.
Conclusion
This ruling reaffirms that an award delivered by an arbitrator ineligible for appointment is inherently invalid. The Court’s decision aligns with the Commercial Court’s determination, underscoring the fairness and integrity of the justice system. By clarifying the criteria for waiving objections to arbitrator appointments, the Court addresses ambiguity and underscores the necessity of explicit written agreements. This judgment also discourages unilateral arbitrator appointments, as it undermines the core principles of fairness, impartiality, and equal participation in dispute resolution. The case law and legislative provisions discussed emphasize the need for balanced arbitrator selection processes to ensure the legitimacy of arbitration outcomes, promoting more balanced Alternative Dispute Resolution (ADR) practices and instilling confidence in parties seeking to resolve disputes without apprehension.
Reference
[1] Kotak Mahindra Bank Ltd. v. Narendra Kumar Prajapat, (2023) SCC OnLine Del 3148.
[2] HRD Corporation v. GAIL (India) Ltd, (2017) ibclaw.in 234 SC.
[3] Bharat Broadband Network Limited v. United Telecoms Limited, (2019) ibclaw.in 153 SC.
[4] Govind Singh v. Satya Group Pvt. Ltd.: 2023/DHC/000081.
[5] Dutco Construction v. BKMI Industrienlagen GmbH et Siemens AG, Judgment of the French Court of Cassation 89-18.708, 7 January 1992.
[6] Rosenberg v. Merrill Lynch, 976 F. Supp. 84 (Mass. 1997).
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