Debasing The TRF And Perkins Principle: Calcutta High Court Upholds A Unilateral Appointment Of Arbitrator

The Calcutta High Court recently in McLeod Russel India Limited & Anr. v. Aditya Birla Finance Limited & Ors.¹ ("McLeod Russel"), upheld a unilateral appointment of arbitrator on the basis that ineligibility under Section 12(5) of the Arbitration and Conciliation Act, 1996 ("the Act") must necessarily be affixed to one or more specific entries in the Seventh Schedule of the Act.

FACTS:

Disputes arose out of an agreement executed between the parties dated March 24, 2018, whereunder the arbitration clause conferred a unilateral right of appointment of arbitrator on the Respondent Material part of the arbitration clause is reproduced hereinbelow –

The Respondent appointed a retired judge of the High Court of Madhya Pradesh as the sole arbitrator ("Sole Arbitrator") on May 11, 2019. The Petitioners participated in the arbitration proceedings, that went on from May 11, 2019 to February 12, 2020. Pertinently, no express agreement in writing to waive the invalidity of the appointment of arbitrator was executed by them, as required under Section 12(5) of the Act. The Petitioners also acted in pursuance of certain orders passed by the Sole Arbitrator, but subsequently challenged the unilateral appointment of arbitrator inter-alia under Section 14 of the Act, that was decided by the Calcutta High Court.

ARGUMENTS:

The Petitioners inter-alia contended that the appointment of the Sole Arbitrator, being unilateral, was void ab initio and its mandate ought to be terminated in light of the decisions in TRF Ltd. v. Energo Engineering Projects Ltd. ("TRF")², Bharat Broadband Network Limited v. United Telecoms Limited ("Bharat Broadband") ³, and Perkins Eastman Architects DPC v. HSCC (India) Limited ("Perkins")⁴. Further, the Petitioners argued that their participation in the arbitration would not amount to an express waiver as contemplated under the proviso to Section 12(5) of the Act.

On the other hand, the Respondents contended that the present Petition was an afterthought and the Petitioners had expressly agreed to the Sole Arbitrator in the manner contemplated under Section 12(5) of the Act, given the fact that the Petitioners never challenged such appointment, rather knowingly and willingly participated in the arbitration proceedings. In the circumstances, the Respondents argued that the various pleadings and affidavits filed by the Petitioners ought to be treated as an express agreement to the appointment of the Sole Arbitrator under the proviso to Section 12(5) of the Act, making the appointment of the Sole Arbitrator valid.

ISSUE:

Can all unilateral appointments of Arbitrators be treated as void ab initio?

FINDINGS:

The Calcutta High Court considered the important decisions on the subject of unilateral appointment such as TRF, Bharat Broadband and Perkins, before finally holding that in the present case, the arbitrator though appointed unilaterally, was done validly in view of the following reasons:

1. The Court distinguished between the present case and the decisions in TRF, Bharat Broadband and Perkins on the ground that these decisions considered an arbitration clause wherein the managing director or any part of the management of one of the parties or a designated person of one of the parties was himself to act as the arbitrator or was the one deciding the appointment of the arbitrator. The Court opined that all these decisions therefore proceeded on the basis that if the appointing authority was himself ineligible under Section 12(5) read with the Seventh Schedule of the Act, such ineligibility would also extend to the person appointed by such appointing authority. However, in the present case, since no specific officer of the Respondent ineligible under the Seventh Schedule had been authorized to appoint the arbitrator, therefore, the unilateral appointment was valid;
2. A unilaterally appointed arbitrator would become ineligible under Section 12(5) of the Act, only if his relationship directly fell under the Seventh Schedule of the Act and not merely because he had been unilaterally appointed. The arbitrator so appointed was a retired judge not otherwise ineligible under the Seventh Schedule, therefore the appointment was valid;
3. "An express agreement in writing" in the manner required under the proviso to Section 12(5) of the Act could be inferred from written pleadings filed by the Petitioners in the arbitration proceedings and the said expression did not entail the requirement of a formal agreement between the parties. Therefore, even assuming the said appointment was invalid for falling within any of the categories mentioned in the Seventh Schedule of the Act, the same stood cured in view of the written pleadings filed by the Petitioners, resulting in the Petitioners admitting to the jurisdiction of the Sole Arbitrator; and
4. The Petitioners could not be allowed to derail the arbitration proceedings at such a belated stage i.e. after having obtained the benefit of the orders passed by the arbitrator, and without even waiting for the arbitrator to decide the Petitioners' Section 13 application filed before the tribunal. The Calcutta High Court also took into consideration the fact that the arbitration proceedings had started after the decisions of the Supreme Court in TRF and Bharat Broadband, and despite having "full knowledge" of the same, the Petitioners never questioned the appointment.

The Court in sum and substance held that not all unilateral appointments of arbitrators can be treated as void ab initio, given that the scheme of the Act allowed the parties to circumvent any and all relationship based conflicts disqualifying an arbitrator under the Seventh Schedule, by way of an "express written agreement".

AUTHORS' VIEWS:

In this section, the authors will be discussing why the aforesaid reasons for upholding the unilateral appointment of an arbitrator do not appear to be in consonance with the well settled jurisprudence laid down by the Supreme Court and various High Courts.

Jurisprudence laid down by Perkins and TRF

In the authors' view, the legality of unilateral appointment of arbitrators is thoroughly considered and well settled, with the exception of unilateral appointments out of broad-based panels, which is pending adjudication by the Supreme Court⁵. The Supreme Court in TRF and Perkins has categorically ruled out the validity of all unilateral appointments on the rationale that a person interested in the outcome of the dispute is not only ineligible to act as an arbitrator but also ineligible to act as an appointing authority. This was done to ensure the "necessity and desirability of impartial and independent arbitrators", considered by the Supreme Court to be the "hallmarks of any arbitration proceedings" and to give full and complete effect to the 2015 amendment of the Act, intended to provide for the neutrality of arbitrators.

The co-relation between unilateral appointment and Section 12(5) read with the Seventh Schedule of the Act

In TRF, the Supreme Court had rejected the contention that, the grounds provided under the Seventh Schedule of the Act pertained specifically to the appointed arbitrator, and not the appointing authority. Therefore, the appointment of an arbitrator was liable to be invalidated only when he was ineligible in terms of the contours of the Seventh Schedule. Pertinently, in TRF too, the unilaterally appointed arbitrator was a former judge of the Supreme Court. However, the Supreme Court had rejected this contention expressly holding that the individual respectability and objectivity of an arbitrator who would otherwise be "eligible and a respected person", was irrelevant if he had been appointed unilaterally. The Supreme Court⁶ has rejected the argument that a "Chairman" of the Respondent ought to be allowed to appoint the arbitrator as he did not fall under any of the disqualified categories under the Seventh Schedule. Similarly, the Bombay High Court⁷ also rejected the contention that the proscription under Section 12(5) of the Act only ran against the person named in the Seventh Schedule from acting as arbitrator or appointing authority and held that the interdiction in fact ran against "any one party" given the unilateral power to constitute the tribunal.

Interestingly, in an earlier decision, the Calcutta High Court⁸, while considering a clause authorizing the Respondent entity (as opposed to a specific officer of the Respondent) to appoint the arbitrator, set aside the appointment of a former judge of the Calcutta High Court. The Calcutta High Court held that the dicta laid down in these judgments⁹ makes it crystal clear that there cannot be unilateral appointment of a sole arbitrator as the same is illegal and defeats the very purpose of unbiased and impartial adjudication of the dispute between the parties.

Scope of "express agreement in writing" for constituting waiver under Section 12(5)

The Supreme Court¹⁰ rejected the contention that filing of written statement of claim would amount to an express agreement in writing, for the reason that such an agreement must be an agreement by which both parties, with the full knowledge that the unilaterally appointed arbitrator is ineligible and still go ahead and say that they have full faith and confidence in the said arbitrator to continue as such. Interestingly, though the Calcutta High Court in the present case does discuss the decision of the Supreme Court, however, it seems to have not considered the aforementioned dicta of the Supreme Court. The Delhi High Court¹¹, has opined that an 'express agreement in writing' means the parties must expressly agree in writing to a waiver of Section 12(5) of the Act and that such agreement must reflect awareness on the part of the parties of the effect of the provision and the resultant invalidation of the arbitrator, along with a conscious intention to waive the applicability of the provision. In a slight deviation, the Madras High Court¹², opined that the phrase "express agreement in writing" cannot be confined to a legal document including words "as I hereby expressly waive ... or the like" to be signed by both parties. It held that such agreement can also be inferred from a series of correspondence or letters exchanged between the parties. However, the Madras High Court also caveated that such express waiver could only be said to arise when the right under Section 12(5) of the Act is specifically brought to the notice of the other party and the response of such party shows the conscious relinquishment of its right.

Therefore, it seems that while the term "express agreement in writing" does not mean that the parties need to execute a formal agreement for waiving the proscription under Section 12(5) of the Act, it is amply clear that such an agreement cannot be said to exist merely by reason of a party filing written pleadings and applications in the arbitration proceedings or even acting in pursuance thereof, without something more. Several High Courts have held, time and again that, notice of invocation of arbitration and response thereof¹³, participation in arbitration proceedings for a substantial period of time¹⁴, completion of pleadings in the arbitration proceedings¹⁵, or even awareness of the party as to authoritative decisions in regard to unilateral appointment¹⁶, was immaterial and could not amount to an "express agreement in writing" required to reverse the effect of Section 12(5) of the Act.

The Stage of raising the unilateral objection

The Delhi High Court¹⁷ has held that a party has the opportunity to raise an objection to the unilateral appointment of an arbitrator virtually at any stage of the arbitral proceedings until the execution of the arbitration award, regardless of whether the same could have been done at an earlier stage. In fact, it is also immaterial whether such party first exhausted the remedy of challenge before the tribunal under Section 13 of the Act¹⁸. The nature of right under Section 12(5) of the Act is such, that the same would accrue irrespective of whether an arbitral award has been passed.¹⁹ Accordingly, a party is not precluded from raising such an objection for the first time at the stage of Section 34 proceedings for setting aside an arbitral award.²⁰ Recently, the Calcutta High Court²¹, rejected an execution petition on the ground that an arbitral award passed by an ineligible arbitrator under Section 12(5) was non-executable, given that his mandate was void ab initio. An arbitral award delivered by an arbitral tribunal lacking inherent jurisdiction cannot be considered as valid. Since ineligibility strikes at the root of the arbitrator's power to adjudicate upon the disputes between the parties, any award by a unilaterally appointed arbitrator is rendered unsustainable and non-executable.

CONCLUDING REMARKS:

In the authors' view, the Calcutta High Court in Mcleod Russel, has taken a technical view to deviate from the well settled ratio laid down by the Supreme Court - whereby as a principle, all unilateral appointments are to be held impermissible on account that no party can be allowed to unilaterally charter the course of the arbitration by having the power to appoint an arbitrator²². Thus, even if the appointed arbitrator is eligible as per the Section 12(5) of the Act, if he has been unilaterally appointed, the said appointment is not valid. Considering the jurisprudence discussed above the rationale applied by the Calcutta High Court appears to be in contravention of the settled position of law. Until the scope, meaning and elements of what constitutes an "express agreement between the parties" required to circumvent the proscription in Section 12(5) is clarified by way of legislative action and amendment, the decision in McLeod Russel (unless set aside) might turn to be a dangerous precedent for parties to validate the unilateral appointment of arbitrators, and by extension defeat the very purpose and intent of the 2015 amendment.

Footnotes

1. 2023 SCC OnLine Cal 330.

2. (2017) 8 SCC 377.

3. (2019) 5 SCC 755.

4. (2020) 20 SCC 760.

5. Union of India v. Tantia Constructions Limited, SLP (Civil) No. 12670 of 2020; JSW Steel v. SW Railway & Anr. SLP (Civil) No. 9462 of 2022.

6. Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited & Ors. v. M/s Ajay Sales & Suppliers, 2021 SCC OnLine SC 730.

7. Lite Bite Foods Pvt. Ltd. v. Airports Authority of India, 2019 SCC OnLine Bom 5163, Hanuman Motors Pvt. Ltd. v. M/s. Tata Motors Finance Ltd. 2023 SCC OnLine Bom 523.

8. Yashovardhan Sinha HUF & Anr. v. Satyatej Vyaapar Pvt. Ltd., 2022 SCC OnLine Cal 2386.

9. In TRF and Perkins

10. In Bharat Broadband.

11. JMC Projects (India) Ltd. v. Indure Private Limited, 2020 SCC, OnLine Del 1950

12. General Manager, CORE v. JV Engineering, 2021 SCC OnLine Mad 2892

13. M/s Osho G.S. & Company v. M/s. Wapcos Limited 2022 SCC OnLine Del 4598

14. AK Builders v. Delhi State Industrial Infrastructure Development Corporation Ltd. 2022 SCC OnLine Del 627, Naresh Kanayalal Rajwani & Ors. v. Kotak Mahindra Bank Ltd. & Anr. 2022 SCC OnLine Bom 6204; Govind Singh v. Satya Group Pvt. Ltd. & Anr. 2023 SCC OnLine Del 37

15. Sohan Minerals and Mining Co. Pvt. Ltd. v. Steel Authority of India Limited Arbitration Petition No. 179 of 2020.

16. AK Builders v. Delhi State Industrial Infrastructure Development Corporation Ltd. 2022 SCC OnLine Del 627.

17. Govind Singh v. Satya Group Pvt. Ltd. & Anr. 2023 SCC OnLine Del 37.

18. P. Cheran v. Gemini Industries & Imaging Limited 2023 SCC OnLine Mad 1887, Hina Suneet Sharma v. M/s. Nissan Renault Financial Services India Private Limited Arb.O.P (Com.Div.) No.159 of 2022, Ram Kumar & Anr. v. Sriram Transport Finance Co. Ltd. 2022 SCC OnLine Del 4268.

19. Govind Singh v. Satya Group Pvt. Ltd. & Anr. 2023 SCC OnLine Del 37.

20. Ram Kumar & Anr. v. Sriram Transport Finance Co. Ltd. 2022 SCC OnLine Del 426, Eco Recycling Ltd v. NRDC 2023 SCC OnLine Del 1651, MS Bridge Building Construction Co. Pvt. Ltd. v. BHEL 2023 SCC OnLine Del 242 and Hanuman Motors Pvt. Ltd. v. M/s. Tata Motors Finance Ltd. 2023 SCC OnLine Bom 523.

21. Cholamandalam Investment and Finance Company v. Amrapali Enterprises & Anr. 2023 SCC OnLine Cal 605.

22. In Perkins.

*Authors: Sohil Shah, Principal Associate and Nidhi Chaudhary, Associate at Pioneer Legal. Views expressed are personal.

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