UNILATERAL APPOINTMENT & REFUSAL TO SET ASIDE THE AWARD: THE PERILS OF THE DELHI HC JUDGMENT

-Rohan Gulati*


Introduction & Factual Background


Recently, in Kanodia Infrastructure Ltd. v. Dalmia Cement (Bharat) Ltd.[1], the Hon’ble Delhi High Court (“High Court”) ruled that challenging the unilateral appointment of an arbitrator at the stage of setting aside the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (“1996 Act”) is not the right stage for doing so. The High Court opined that the scope of interference with the arbitral award is relatively narrow and it is permitted only when the arbitral tribunal exceeds its jurisdiction or travels beyond the scope of the contract.


Insofar as the conspectus of the case was concerned, Kanodia Infratech Ltd. (“Petitioner”) and Dalmia Cement (Bharat) Ltd. (“Respondent”) agreed on a Memorandum of Understanding for the use of cement grinding plant at Bihar (“Plant”) by the Respondent. Due to conditional delays in the execution of the share purchase agreement, it was agreed that the Respondent could commence the operations at the Plant. Accordingly, multiple agreements were executed between the Petitioner and Respondent. For efficient functioning of the Plant, the entire gamut of operations and control was entrusted to the Respondent.


Allegedly, the Petitioner was kept in the dark about the day-to-day operations and decisions made by the Respondent, which was troublesome for the Petitioner. One of the key obligations of the Respondent was to procure a clinker for the Plant, which it failed to fulfill. Thus, due to the lack of proper equipment, the Respondent was found to be running into losses and unable to run the Plant. Distraught, the Petitioner intended to terminate the commercial relationship with the Respondent.


To further restrict the access of the Respondent, the Petitioner approached the High Court under Section 9 of the 1996 Act. However, the Respondent had invoked arbitration and appointed a sole arbitrator only a day prior to this petition. The Petitioner withdrew the petition with the liberty to approach the sole arbitrator under Section 17 of the 1996 Act. After hearings were concluded, the sole arbitrator passed an award in favor of the Respondent. Troubled with the decision, the Petitioner filed an application for setting aside the arbitral award.

Judgment of the High Court


Firstly, the Petitioner challenged the arbitral award on the premise that the Respondent held a unilateral power in the appointment process of the learned sole arbitrator. However, the High Court’s ruling goes to show that it considered the active participation of the Petitioner in the arbitration as a waiver to challenge the unilateral appointment of the arbitrator. The High Court highlighted multiple instances of the Petitioner’s participation:


(i) Withdrawal of Section 9 petition (for interim measures from the court) from the High Court with the liberty to approach the sole arbitrator under Section 17 (interim measures from the tribunal) of the 1996 Act;


(ii) Filing an application under Section 16 of the 1996 Act that challenged the composite reference of the disputes to arbitration (but not the appointment of the arbitrator);


(iii) Filing of counterclaims during the arbitral proceedings;


(iv) The Petitioner had also given consent for an extension of time under Section 29A(iii) of the 1996 Act for the completion of the proceedings.

In view of the High Court, the abovementioned instances sufficiently established that the Petitioner had submitted to the jurisdiction of the sole arbitrator.


Secondly, the High Court opined that despite the judgment of the Hon’ble Supreme Court of India in Perkins Eastman Architects DPC v. HSCC (India) Ltd.[2] (“Perkins”), the Petitioner did not object to the unilateral appointment of the arbitrator. Further, the learned single judge concluded by stating that since the award did not favor the Petitioner, it has approached the High Court at a belated stage.


Thirdly, the High Court distinguished the authoritative judgments of the Supreme Court in Perkins and TRF Ltd. v. Energo Engineering Projects Ltd.[3] (“TRF Ltd.”) from the present matter on the basis of the stage of the proceedings. It categorically noted that the Supreme Court precedents were dealing with petitions filed under Section 11 at the pre-arbitral stage, whereas the present petition, being under Section 34, permitted only a narrow range of court interference. The High Court distinguished all the relevant precedents on this point alone.


Fourthly, and significantly, the High Court set aside one claim involving compensation of Rs. 4 Crores that was granted in favor of the Respondent as it was considered to be distinct from all other claims. The High Court opined that this claim was wrongly granted by the learned sole arbitrator since it dealt with issues not contemplated by the parties in the arbitration.


In view of the four-prongs discussed hereinabove, the High Court refused to set aside the arbitral award on the ground that the appointment of the sole arbitrator was unilateral and ruled that it was not open to the Petitioner to have challenged the same at the belated stage i.e., under Section 34 of the 1996 Act.


Analysis


Having dissected the judgment in four broad points, the stage is now set to first, explore the legislative avenues that are likely to entertain a challenge to the unilateral appointment even at a belated stage of Section 34; second, succinctly trace the judicial discourse on unilateral appointments so far; third, critically examine the decision of the High Court and critique it frame by frame.


A. Legislative Avenues and Beyond


It is trite to mention that the scope of interference exercised by the courts under Section 34 of the 1996 Act is relatively narrow and limited. Notwithstanding the scope of interference under Section 34, the doors must be left open in cases that challenge the unilateral appointment at the stage of setting aside the arbitral award. The reason for the same is founded on dual fronts viz., (i) an arbitration conducted by an ineligible arbitrator is non-est in law, and (ii) Section 34, though limited in its scope, would be open to burying the award in case of procedural irregularity that is clear as noonday.


To elaborate on the first front, it is significant to note that in case an arbitrator lacked jurisdiction since the outset due to their unilateral appointment, any decision rendered by him would essentially be bereft of jurisdiction.[4] This would render the entire arbitral proceedings null and void, including the award. Therefore, if an award rendered by an ineligible arbitrator was to be challenged, it would be more susceptible to being set aside rather than being upheld.


Significantly, in Bharat Broadband Network Ltd. v. United Telecoms Ltd.[5], the Supreme Court had observed that the de jure ineligibility of the arbitrator appointed by a person who is himself ineligible would render the appointment void ab initio. Consequently, the judgment reflects that any decision of the ineligible arbitrator would also be void regardless of the stage at which it has been passed by an ineligible arbitrator.


On the second front, the phrase ‘procedural irregularity’ has been applied to expressly rely upon Section 34(2)(a)(v). A meticulous reading of this provision would reflect that where the composition of the arbitral tribunal, with or without the agreement of the parties, goes against the non-derogable provisions of Part I of the 1996 Act, the arbitral award may be set aside. Bearing this in mind, if the arbitration agreement conflicts with such non-derogable provisions, the former will cease to operate due to being invalid, thus opening the doors for the courts to set aside the arbitral award.


It is further argued that a party is not precluded from raising the ground of unilateral appointment for the first time under Section 34 where there is an absence of an express agreement in writing that waives off the right to object.[6] This is in light of Section 12(5) of the 1996 Act, whose proviso sets a high standard of requirement – it mandates an express written agreement that would waive any reservation of the parties apropos any justifiable doubt about the arbitrator’s eligibility. It would also be safe to mention that there is nothing that precludes the courts from invalidating the arbitration agreement that conferred a unilateral right to one party alone at the stage of setting aside the arbitral award. After all, having a valid arbitration agreement is one of the basic and foremost tenets of any and every arbitration.


In sum, there is nothing that precludes the courts from setting aside an award where the sole arbitrator was appointed unilaterally by one party alone. Despite being a belated stage, Section 34 should not withstand any procedural irregularity that goes against the letter and spirit of the 1996 Act.


B. The Chronicles of Unilateral Appointment


The judgment in Perkins is the most authoritative decision regarding unilateral appointments wherein the Supreme Court had unequivocally ruled that arbitration clauses that provide for the unilateral appointment of a sole arbitrator could not withstand the objectives of the 1996 Act i.e., to promote fairness and impartiality in arbitration. It also categorically held that if only one party has the right to appoint a sole arbitrator, its choice will always have an element of exclusivity in charting the course of dispute resolution.[7] Thus, unilateral appointment was held to be impermissible.


Relevantly, in TRF Ltd. (a judgment before Perkins), the Supreme Court had gone one step ahead to observe that an appointment made by an ineligible arbitrator is also void ab initio. In other words, if an arbitrator was ineligible due to his past/present relationship with one of the parties in the dispute, even he could not appoint another arbitrator since his nomination is likely to reflect the individual’s interest in the outcome of the dispute.


Notably, in Proddatur Cable TV Digi Services v. SITI Cable Network Ltd.[8], the Delhi High Court relied extensively on Perkins and ruled that even a company could not be a unilateral appointing authority in an arbitration agreement. It was further noted that despite party autonomy being a cornerstone of arbitration, the same could not override the principles of impartiality and fairness in arbitral proceedings.[9]


C. Examining the Judgment of the High Court


Reverting to the analysis of the High Court judgment, it is significant to point out that one of the primary reasons for refusing to set aside the award was perhaps the stage at which the Petitioner portrayed the challenge to the unilateral appointment. Bearing the same in mind, it is pertinent to move frame by frame.


Firstly, the High Court erred in construing that the active participation of the Petitioner in the arbitral proceedings could be equated with a waiver to challenge the eligibility of the sole arbitrator. As discussed, Section 12(5) sets a high threshold criterion by requiring a written agreement that waives the reservations. In fact, it can be discerned from the factual matrix that the Petitioner at no point agreed to waive their reservation concerning the lack of consensus in appointing the sole arbitrator. Thus, merely filing applications before the sole arbitrator certainly does not indicate a waiver. On the contrary, the Petitioner showed a fair understanding of the process by withdrawing the Section 9 petition after becoming aware that the arbitral tribunal had been constituted which is precisely in accordance with Section 9(3) of the 1996 Act.

Secondly, the High Court erroneously based its reasoning on the stage at which the Petitioner had challenged the unilateral appointment since any arbitral proceedings conducted by an ineligible arbitrator would be non-est in law. Additionally, by strictly following the observations of the Supreme Court in Perkins and TRF Ltd., any decision rendered by an ineligible arbitrator would fail to pass the muster of the law. Incidentally, in Ace Pipeline Contracts Pvt. Ltd. v. Bharat Petroleum Corp.[10], the Supreme Court had observed that where one party feels that the arbitrator has not acted independently and impartially, it would always be open for the aggrieved party to make an application under Section 34 praying for setting aside the award on the ground that the arbitrator acted with bias or malice in law or fact.[11] This is relevant as one of the core concerns surrounding unilateral appointment is the doubt of impartiality.

However, even if we were to briefly assume that the Petitioner had raised the challenge to the unilateral appointment at a belated stage, it did not preclude the High Court from setting aside the award. The practice of unilateral appointment is such that it goes to the very root of the matter and poses a very high probability that the party making such appointment was conferred with an upper hand in charting the course for dispute resolution. Moreover, a challenge that is mounted against the unilateral appointment would not even warrant the courts to look into the merits of the case which would also keep the court within the bounds of Section 34.


Thirdly, it can be discerned on merits that the High Court was well versed with the award and the claims submitted by the Respondent since an additional claim that was granted by the sole arbitrator was set aside. Bearing this in mind, the High Court erred in observing that the Petitioner was challenging the award since it was not granted in their favor. It is submitted that the Petitioner had raised valid grounds of challenging the arbitral award since it suffered from an element of bias due to the unilateral appointment. Therefore, there was no reason for the High Court to cast blame on the Petitioner when the arbitral award suffered from certain vices and possibly an element of bias. The thin line of difference between genuine award-debtors and frivolous ones must be appreciated and respected - even though the Petitioner might have arrived late did not mean that the doors of justice are closed on his face.


Conclusion


It is imperative to note that this judgment has conveyed something more than what meets the eye. One of the key takeaways from the present judgment lies in the adoption of a more active approach towards challenging the unilateral appointment and not waiting until the award is passed. A more pragmatic and appropriate avenue for challenging the unilateral appointment is by raising an objection via filing an application before the concerned court during the pendency of the arbitration itself. Whilst the 1996 Act does not prescribe any particular stage, the party must challenge the appointment of the arbitrator at the earliest stage and first possible instance to prevent any more wastage of time and resources. Implementing a pro-active approach by filing the application in a timely manner would also bolster the good faith nature of the suit and negate arguments of delaying the enforcement of the arbitral award.


To conclude on the critique of the present judgment, the High Court was faced with a unique opportunity to expound and chart a better jurisprudence on this point of law. However, the High Court severely erred in its findings whilst it adopted a hands-off approach, which may prove to be counter-intuitive moving forward. It would also restrict the parties from challenging the unilateral appointment at the stage of setting aside the award despite the presence of appropriate legislative avenues and the absence of any specific restrictions (apart from the present judgment). To end, Jan Paulsson, one of the foremost practitioners to argue against the very concept of unilateral appointments had opined as follows:


“…why should not every appointment be joint, or at least made from a list of individuals proposed by a similarly reliable institution? Above all, this attractive model is simply unrealistic with respect to the run of the mill of arbitration. And if arbitration cannot produce run of the mill quality, it will be condemned to function as an enclave of limited relevance.”[12]


 

* Rohan Gulati is a Junior Staff Editor for the Arbitration Workshop Blog. He is currently a final-year student pursuing B.B.A. LL.B at Symbiosis Law School, Hyderabad. He can be contacted at rohan.gulati@student.slsh.edu.in [1] 2021 SCC OnLine Del 4883. [2] 2019 SCC OnLine SC 1517. [3] (2017) 8 SCC 377. [4] Shashank Garg, ‘Arbitrators’ under Distress: The Fate of Unilateral Appointments, (Bar and Bench, Jan 2020) <https://www.barandbench.com/columns/arbitrators-under-distress-the-fate-of-unilateral-appointments> accessed 15 November 2021. [5] (2019) 5 SCC 755. [6] Ramkishore Karanam and Mahasweta M., What is the Appropriate Stage to Challenge Unilateral Appointment (SCCOnline.com, Oct 2021) <https://www.scconline.com/blog/post/2021/10/16/unilateral-appointment/> accessed 15 November 2021. [7] Supra note 2 at ¶ 16. [8] 2020 SCC OnLine Del 350. [9] Id., at ¶ 24. [10] (2007) 5 SCC 304. [11] Id.,21. [12] Jan Paulsson, Must We Live with Unilaterals? 1 ABA 5, 7 (2013).

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