The High Court of Delhi, in the case of Smaash Leisure Ltd. vs. Ambience Comemrcial Developers Private Limited1 has held that a statement made by a party's counsel before the Arbitrator withdrawing objection to unilateral appointment would not suffice the requirement of 'express agreement' under Section 12 (5) of the Arbitration and Conciliation Act, 1996 ("Act").
Section 12 of the Act provides for grounds to challenge appointment of an arbitrator. Section 12 (3) of the Act states that an arbitrator may be challenged only if: (i) circumstances exist that give rise to justifiable doubts as to his independence or impartiality; or (ii) he does not possess the qualifications agreed to by the parties. A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.
Section 12 (5) of the Act stipulates that "Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator; provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing."
The Seventh Schedule of the Act defines ineligible arbitrators based on the relationship between the parties or their counsel; relationship of the arbitrator to the dispute and the arbitrator's direct or indirect in the dispute. For instance, if the arbitrator is an employee, consultant, advisor or has other past or present relationship with a party; the arbitrator currently represents or advises one of the parties or an affiliate of one of the parties; the arbitrator has given legal advice or provided an expert opinion on the dispute to a party or its affiliate; the arbitrator holds shares, either directly or indirectly, in one of the parties or an affiliate of one of the parties that is privately held, etc, he/she shall be ineligible to be appointed as an arbitrator.
In the case of Smaash Leisure Ltd. vs. Ambience Comemrcial Developers Private Limited, the petitioner, Smaash Leisure Ltd. ("Petitioner") entered into a lease deed dated August 1, 2017 with Ambience Comemrcial Developers Private Limited ("Respondent") for lease of a premises in Ambience Mall, Vasant Kunj, New Delhi, for operating and managing an entertainment centre comprising bowling alleys and other activities for public entertainment. The lease period was 20 years, however, on account of financial distress, the petitioner was constrained to terminate the lease deed vide a termination letter dated February 20, 2020. Vide its email dated September 25, 2020, the Respondent invoked the dispute resolution under Clause 25 and proposed the names of three former judges of the Delhi High Court, requesting the Petitioner to nominate one of them as the sole Arbitrator. On October 6, 2020, the Petitioner communicated its unequivocal non-acceptance of the three names.
Despite the opposition, the Respondent appointed a sole Arbitrator and sent a communication to the Arbitrator on October 7, 2020 in this regard, also requesting the Arbitrator to give a declaration under Section 12 of the Act. Aggrieved by the unilateral appointment, the Petitioner wrote to the Arbitrator on October 8, 2020 apprising that the arbitration clause under the lease deeds does not contain any provision to deal with a situation where the lessee does not accept the proposal of the appointment of the sole Arbitrator made by the lessor. The Petitioner requested the Arbitrator to take on record its objection against the appointment as the Petitioner would be approaching the Respondent for appointment in terms of Section 11(5) of the Act. A preliminary hearing was conducted on October 27, 2020, wherein, the Petitioner stated that an endeavour shall be made to settle the disputes amicably. During the hearing dated November 9, 2020, the Petitioner withdrew its objection against the appointment of the Arbitrator. The Respondent filed the Statement of Claim on November 17, 2020, however, the Petitioner did not join the arbitral proceedings after November 27, 2020 and did not file the Statement of Defence. Despite the Petitioner's non-participation, the arbitrator proceeded to pass the impugned awards. The Petitioner challenged the same under Section 34 of the Act on the following grounds: (i) that the appointment was unilateral and contrary to the principle of party autonomy, as emphasized in the Supreme Court's judgment in Perkins Eastman Architects DPC and Another v. HSCC (India) Limited2; (ii) that the Respondent's unilateral appointment is not only a breach of contract but also contrary to established legal principles governing arbitration in India; (iii) that the award passed by the arbitrator are non est as due to the illegality of the appointment, the proceedings before the arbitrator were void ab initio; and (iv) that any waiver of objection to the unilateral appointment must be by an express agreement in writing, as mandated by Section 12(5). Merely recording a withdrawal of objection during proceedings is insufficient to constitute a valid waiver.
The Respondent refuted the Petitioner's arguments on the following grounds: (i) that the Petitioner, by participating selectively in the arbitral proceedings after withdrawing its objection, had waived its right to challenge the appointment. It contended that the Petitioner's conduct amounted to a valid waiver under the proviso to Section 12(5) of the Act; (ii) that allowing the Petitioner to challenge the appointment at a late stage would be unfair and cause prejudice. The Respondent relied on the principle of estoppel, emphasizing that the Petitioner's actions implied mutual consent to the Arbitrator's appointment; and (iii) that challenges related to the appointment's legality should not be entertained under Section 34 of the Act.
The Court looked into the issue of unilateral appointment of the arbitrator and held that when the Petitioner had objected to the appointment of the proposed arbitrators, the proper course for the Respondent was to seek a Court appointment under Section 11 (5) and (6) of the Act, which they failed to adhere to. The Court also rejected the Respondent's argument regarding waiver by the Petitioner. It held that mere participation on the arbitral proceedings or a statement before the arbitrator cannot substitute the requirement of an 'express agreement' in writing as prescribed under Section 12 (5) of the Act.
The Court also clarified that awards rendered by an ineligible arbitrator are void. The Hon'ble Court, accordingly, set aside the award on ground of ineligibility of the arbitrator and reserved the parties' right to re-agitate their claims before another tribunal.
Footnotes
1.O.M.P. (Comm) 180/2022
2.(2020) 20 SCC 760
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