Sections 12 – 16 of the Arbitration and Conciliation Act, 1996 (‘the Act') deal with challenge of the composition and jurisdiction of the Arbitral Tribunal. The Hon'ble Supreme Court of India has passed some landmark cases on appointment and challenge of arbitrators which lay down the jurisprudence on the issue, like TRF Ltd. v. Energo Engineering Projects Ltd.1 (‘TRF Ltd.'), Bharat Broadband Network Ltd. v. United Telecoms Ltd.2 (‘BBNL'), Perkins Eastman Architects DPC v. HSCC (India) Ltd.3 (‘Perkins Eastman') among others.  These cases have held that a person is ineligible to act as an arbitrator if he was unilaterally appointed by a person who himself was ineligible to act as an arbitrator.

In this article, the author shall discuss if challenge to a unilaterally appointed arbitrator under the Act can be made post completion of arbitral proceedings in view of the settled legal position, set out above.   

Challenge to appointment post passing of the arbitral award

The Delhi High Court recently passed a judgment on this proposition in the case of Kanodia Infratech Ltd. v. Dalmia Cement (Bharat) Ltd.4 (‘Kanodia Infratech'). In Kanodia Infratech, the parties entered into a series of agreements regarding manufacturing and marketing of cement. When disputes arose, the Respondent invoked arbitration and appointed a former High Court judge as arbitrator. Post appointment, arbitration commenced, and the Tribunal passed the final award as well. The present petition was filed under Section 34 of the Act on the ground that the arbitrator lacked inherent jurisdiction since he was unilaterally appointed, which was contrary to law.

After hearing lengthy submissions and considering the landmark cases on challenge of arbitrator appointment, the Court rejected the challenge on the ground that since the Petitioner never objected to the appointment during the pendency of the arbitration, rather the parties participated actively in the arbitration wherein almost 45 orders were passed, the objection could not be raised at such a belated stage. The Court observed that since, “the arbitral award so pronounced by the learned Arbitrator does not favour the petitioner, it has approached this Court challenging jurisdiction of Arbitral Tribunal itself.”

 

Conflicting Observation in Kanodia Infratech

The Court while passing its final judgment failed to take into consideration the fact that the “Petitioner also filed an application under Section 16 of the Act challenging the jurisdiction of the learned Arbitrator” after the parties filed their statement of claims and counter claims which was heard and dismissed by the Tribunal. However, on another instance the Court notes that the application “under Section 16 of the Act before the learned Arbitrator, whereunder it had challenged the composite reference of the disputes arising out of the 4 separate agreements but not the appointment of learned Arbitrator.”

Scheme of the Act

It is imperative to lay down the scheme of the Act under Section 16 for easier understanding before analysing the Kanodia Infratech case. Under the said Section, three types of objections can be raised on the jurisdiction of the Arbitrator:

  • First Category: Objection that the Tribunal lacks jurisdiction, however the same shall be raised not later than filing of statement of defence although if delay is justified such application is allowed;
  • Second Category: Objection that the Tribunal has exceeded the scope of its authority, which shall be raised as soon as the event took place although if delay is justified such application is allowed;
  • Third Category: Objection regarding existence or validity of the arbitration agreement.

If the party is not satisfied with the outcome of the application, then the party can make an application under Section 34 to set aside such award.

Analysis

From the facts laid down in the case, it is unclear if the Section 16 application challenged the jurisdiction of the arbitrator or objected to the scope of authority of the arbitrator. However, if the case falls in the first category (i.e., challenged the jurisdiction of arbitrator), then the Court should have followed the scheme of the Act under Section 16(6) which allows the aggrieved party to raise a claim regarding jurisdiction under a Section 34 petition.

In the alternative, the Court should have relied on Perkins Eastman wherein the Hon'ble Supreme Court held that “in cases where one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015…”. The Court in TRF Ltd. held that “By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator…It is inconceivable in law that person who is statutorily ineligible can nominate a person.”

The Court in Kanodia Infratech did not place reliance on Perkins Eastman because the latter was not an observation under Section 34 petition. However, since it is an accepted position in law that unilateral appointment is impermissible in law and is also the intent of the legislature via the 2015 Amendment. Following the law laid down in Perkins Eastman and TRF Ltd., in Kanodia Infratech the Court should have struck down the unilateral appointment of the sole arbitrator.

Whereas if the case falls under the second category (i.e., objection to scope of authority), then firstly, this objection can be raised at any time after knowing of the circumstance as recorded in Section 16(3) of the Act and secondly, this objection can be raised for the first time in collateral proceedings. The Court in Hindustan Zinc Ltd. v. Ajmer Vidyut Vitran Nigam Ltd.5 (‘Hindustan Zinc') dealt with the challenge to an arbitrator's appointment in the first appeal stage under Section 37 of the Act. While granting relief to the party the Court inter alia held that “if there is an inherent lack of jurisdiction, the plea can be taken up at any stage and also in collateral proceedings”. The Court further relied on Kiran Singh and Others v. Chaman Paswan and Others6 upon a judgment which held “… It is a fundamental principle well-established that a decree passed by a court without jurisdiction is a nullity, and that its invalidity could be set up whenever and wherever it is sought to be enforced or relied upon, even at the stage of execution and even in collateral proceedings. A defect of jurisdiction, whether it is pecuniary or territorial, or whether it is in respect of the subject-matter of the action, strikes at the very authority of the Court to pass any decree, and such a defect cannot be cured even by consent of parties.”

The Court in Kanodia Infratech while considering the judgment in Hindustan Zinc, ignored the principle laid down and dismissed reliance on the case since it did not directly challenge the unilateral appointment but challenged the authority to make such unilateral appointment.

In the author's opinion, the Court should have on the basis of settled principles, granted relief and not dismissed the claim to terminate the mandate of the arbitrator on merely technical grounds.

Footnotes

1 (2017) 8 SCC 377

2 (2019) 5 SCC 755

3 2019 SCC OnLine SC 1517

4 2021 SCC OnLine Del 4883

5 (2019) 17 SCC 82

6 (1955) 1 SCR 117

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.