Bombay High Court: Unilateral Arbitrator Appointment Void for Violating Party Autonomy and Fairness; ₹11.21 Crore Arbitration Award Set Aside

Court’s Decision:

The Bombay High Court ruled that the unilateral appointment of an arbitrator violated the principles of party autonomy and fairness in arbitration. Consequently, it set aside the arbitration award of ₹11.21 crores, emphasizing that arbitration proceedings must comply with the Arbitration and Conciliation Act, 1996 (“the Act”). The judgment underscored that the composition of an arbitral tribunal that lacks mutual consent or contravenes statutory provisions is inherently void.

Facts:

1. Background of Dispute:
   • The petitioner and respondent were in dispute over a Memorandum of Understanding (MOU), which the respondent claimed provided for “facilitation consideration” for securing subcontract work for the petitioner.
   • The petitioner denied the validity of the MOU, alleging it was forged and intended as a “bribe.”
2. Dispute and Arbitration:
   • The respondent claimed payments under the MOU and invoked arbitration, unilaterally appointing Mr. A. Jagannathan as the sole arbitrator.
   • The petitioner raised objections to the appointment, arguing that it lacked mutual consent as required under the Act and that the arbitrator lacked jurisdiction.
3. Proceedings and Award:
   • Despite objections and non-participation by the petitioner, the arbitrator proceeded and passed an award of ₹11.21 crores along with interest in favor of the respondent.

Issues:

1. Was the unilateral appointment of the arbitrator valid under the Act?
2. Did the appointment and the arbitrator’s proceedings comply with the arbitration agreement?
3. Did the arbitral tribunal have jurisdiction to continue proceedings in the absence of mutual consent?

Petitioner’s Arguments:

1. Forgery Allegation:
   • The petitioner argued that the MOU was forged, fabricated, and void ab initio, claiming it facilitated illegal payments (bribes).
2. Unilateral Appointment:
   • The petitioner contended that the unilateral appointment of the arbitrator contravened the principles of fairness, impartiality, and party autonomy.
3. Lack of Jurisdiction:
   • The petitioner stated that the arbitrator had no jurisdiction to proceed without mutual consent, rendering the proceedings and award invalid.

Respondent’s Arguments:

1. Procedural Lapse by Petitioner:
   • The respondent argued that the petitioner failed to challenge the arbitrator’s jurisdiction within the prescribed time under Section 13 of the Act.
2. Participation Implies Consent:
   • The respondent contended that the petitioner had indirectly participated in the arbitration by making submissions and was now estopped from challenging the award.

Analysis of the Law:

1. Party Autonomy and Independence:
   • Arbitration is founded on the principles of party autonomy (the right of parties to mutually decide procedures, including the appointment of arbitrators) and independence (the arbitrator must remain impartial).
   • The Court emphasized that these principles are sacrosanct and cannot be diluted through unilateral appointments.
2. Unilateral Appointments:
   • Referring to Central Organisation for Railway Electrification vs. ECI-SPIC SMO MCML (JV), the Court observed that clauses permitting unilateral appointments undermine impartiality and fairness, even if agreed upon by the parties.
3. Jurisdictional Challenges:
   • The Court highlighted that Section 16 of the Act empowers an arbitral tribunal to rule on its jurisdiction. However, in this case, the arbitrator failed to address key objections about his unilateral appointment and the absence of mutual consent.
4. Invalid Composition of Tribunal:
   • The arbitration clause in the MOU did not provide for unilateral appointments. The respondent’s failure to approach the Court under Section 11 of the Act to appoint an arbitrator was a significant procedural lapse.
5. Public Policy and Patent Illegality:
   • The award was found to be in conflict with public policy and vitiated by patent illegality, violating fundamental principles of the Act.

Precedent Analysis:

• Central Organisation for Railway Electrification vs. ECI-SPIC SMO MCML (JV):
  • The Supreme Court held that unilateral appointment clauses are unenforceable as they compromise arbitrator independence.
• The Court reaffirmed that party autonomy must yield to fairness and impartiality in arbitration.

Court’s Reasoning:

1. Unilateral Appointment Invalid:
   • The arbitrator’s appointment was not a product of mutual agreement or court intervention. This rendered the composition of the tribunal void ab initio.
2. Absence of Mutual Consent:
   • The arbitration clause in the MOU did not authorize unilateral appointments, making the proceedings fundamentally flawed.
3. Patent Illegality:
   • The unilateral appointment and subsequent award contravened the fundamental principles of Indian arbitration law.
4. No Estoppel Against Law:
   • The Court rejected the respondent’s argument that the petitioner was estopped from challenging the award due to indirect participation. It emphasized that jurisdictional objections could not be waived or overridden by procedural arguments.

Conclusion:

The Court set aside the arbitration award under:

1. Section 34(2)(a)(v): The tribunal’s composition was not in accordance with the arbitration agreement or the Act.
2. Section 34(2)(b)(ii): The award violated public policy by undermining fairness and impartiality.
3. Section 34(2-A): The award was vitiated by patent illegality on the face of the proceedings.

Implications:

1. Reinforcing Fairness in Arbitration:
   • The judgment strengthens the principle that unilateral arbitrator appointments are invalid, even if unchallenged procedurally.
2. Protecting Party Autonomy:
   • The decision underscores that arbitration must strictly adhere to agreed procedures and statutory requirements.
3. Guidance for Future Arbitrations:
   • The ruling clarifies that courts will not uphold awards derived from improperly constituted tribunals, preserving the integrity of arbitration as a dispute resolution mechanism.

Also Read – Bombay High Court Affirms Reassessment Proceedings for Undisclosed Income, Emphasizes Jurisdictional Limits and Right to Appeal