1. INTRODUCTION

On 17 May 2023, the division bench of the High Court of Delhi (“Court”) in Kotak Mahindra Bank Limited vs. Narendra Kumar Prajapat1 held that an arbitral award passed by an arbitrator unilaterally appointed by a party is a nullity and thus, cannot be enforced.

2. BACKGROUND

Pursuant to arbitral proceedings before a sole arbitrator, an arbitral award amounting to the sum of INR 4,66,103.30/- along with an interest of 18% per annum (“Award”) was awarded in favour of D.H. Finance Company (“DH Finance”), which award was assigned by DH Finance to Kotak Mahindra Bank Limited (“Kotak Mahindra”). Thereafter, Kotak Mahindra filed an application before the Commercial Court, Delhi for enforcement of the Award, which was dismissed by an order dated 23 November 2022 on the ground that the Award was rendered ex-parte by an arbitrator that was unilaterally appointed by DH Finance without any consent of the opposite party. The Commercial Court had also observed that the arbitrator was ineligible to act as an arbitrator in terms of Section 12(5) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) and thus an award rendered by a person who is ineligible to act as an arbitrator is a nullity and thus could not be enforced. To send out a strong message to all the Banks and NBFCs indulging in this practice of unilateral appointment of sole arbitrators, the Commercial Court also imposed a cost of INR 25,000/- on Kotak Mahindra.

3. DECISION AND ANALYSIS OF THE COURT

The Court observed that the arbitrator had been appointed unilaterally by DH Finance, without the consent of the opposite party. Kotak Mahindra's contention was that, since the opposite party was aware of the appointment of the arbitrator and the consequent arbitral proceedings and in fact did not raise any objection to the appointment, it is precluded from challenging the Award. The Court did not find any merit in Kotak Mahindra's submissions as the Court observed that the conditions set out in section 12(5) of the Arbitration Act concerning a party's waiver to its right to object to the ineligibility of an arbitrator are unambiguous and were not met with in the present case. The twin conditions set out by the Arbitration Act are as under:

  1. The waiver is required to be done by an express agreement in writing; and
  2. That such express written agreement is entered into after the disputes have arisen between the parties.

In view of the above, the Court observed that the right to object to the ineligibility of an arbitrator could not be waived due to the conduct of the party and such a waiver can only be by an express agreement in writing. In this regard, the Court placed reliance upon Bharat Broadband Network Limited vs. United Telecoms Limited2 . Further, the Court, while relying upon, inter alia, Perkins Eastman Architects DPC and Anr. vs. HSCC (India) Ltd.3 and Proddatur Cable TV Digi Services vs. Siti Cable Network Limited4 , held that it was not permissible for a party to unilaterally appoint an arbitrator without the consent of the other party and that a person who was ineligible to act as an arbitrator himself, could not appoint an arbitrator.

The Court also, inter alia, relied upon the judgment of the Hon'ble Supreme Court of India (“Supreme Court”) in HRD Corporation vs. GAIL (India) Limited5 and held that since the arbitrator in the present case was also ineligible under Section 12(5) of the Arbitration Act, he lacked the inherent jurisdiction to render an arbitral award and thus, the Award was a nullity and could not be enforced.

Further, the court also pulled up Kotak Mahindra for the unexplained delayed filing of the appeal and strongly stated that delay in taking necessary steps for recovering the documents from one's own office cannot be a ground for condoning the delay unless certain extenuating circumstances exist.

In view of the above, the Court agreed with the view of the Commercial Court and dismissed the appeal on merits and delay.

4 QUICK VIEW

Although numerous judgments have deprecated the practice of unilateral appointment of arbitrators, there still are several instances where parties attempt to initiate arbitration proceedings by unilaterally appointing arbitrators, which is not only in contravention to the provisions of the Arbitration Act but also in the teeth of the law expressly laid down by the Supreme Court. The Court, through the judgment, reiterates the settled position of law concerning appointment of arbitrators and the right of the parties to object to the ineligibility of an arbitrator in terms of section 12(5) of the Arbitration Act. The judgment also clarifies that such waiver must be expressly agreed upon in writing and cannot be construed by the conduct of the party.

The Court's affirmation of the Commercial Court's decision marks a significant milestone in promoting fairness, impartiality, transparency and upholding the principles of natural justice within India's arbitration regime. This precedent signifies that people can repose their trust in the Indian judiciary to ensure that a fair alternative dispute resolution (ADR) mechanism is available to them. By reinforcing transparency and impartiality, this decision will bolster public confidence in the arbitration process and its effectiveness in delivering reliable outcomes.

Footnotes

1. 2023 SCC Online Del 3148

2. (2019) 5 SCC 755

3. (2020) 20 SCC 760

4. (2020) 267 DLT 51

5. (2018) 12 SCC 471

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