Court’s decision
The Delhi High Court set aside an arbitral award passed in favour of a company, holding that the arbitral proceedings were vitiated because the sole arbitrator was unilaterally appointed by one of the contracting parties in violation of Section 12(5) read with Schedule VII of the Arbitration and Conciliation Act, 1996.
Justice Chandra Dhari Singh ruled that unilateral appointment by an interested party strikes at the root of impartiality and independence, which are the “hallmarks of arbitration.” The Court reaffirmed that such appointments are void ab initio and cannot be cured by subsequent participation of the opposite party.
“The unilateral appointment of an arbitrator by one party, who has a vested interest in the outcome, fundamentally destroys the concept of neutrality that is the lifeblood of arbitral justice.”
Accordingly, the award was quashed, and liberty was granted to the parties to seek the appointment of a fresh arbitrator in accordance with Section 11 of the Act, ensuring mutual consent and judicial oversight.
Facts
The dispute arose out of a contractual agreement between the petitioner and the respondent, containing an arbitration clause empowering the respondent to unilaterally appoint the sole arbitrator in case of disputes. Following disagreements regarding contractual obligations, the respondent invoked arbitration and appointed a sole arbitrator without consulting the petitioner.
The petitioner objected to this appointment, asserting that it violated the principles of impartiality under Section 12(5) and the Seventh Schedule of the Arbitration Act. Despite this, the arbitrator proceeded ex parte and rendered an award in favour of the respondent.
Aggrieved, the petitioner approached the Delhi High Court under Section 34 of the Act, seeking to set aside the award on the grounds that the appointment was void, illegal, and contrary to settled law established by the Supreme Court.
Issues
- Whether the unilateral appointment of the sole arbitrator was valid under Section 12(5) of the Arbitration and Conciliation Act.
- Whether the arbitral award rendered by such an arbitrator is liable to be set aside under Section 34.
- Whether the petitioner’s participation or delay in challenging the appointment could amount to waiver or acquiescence.
Petitioner’s arguments
The petitioner contended that the unilateral appointment of the sole arbitrator was void ab initio, as the respondent was an interested party with a direct stake in the outcome. It was argued that impartiality and independence are non-derogable principles of arbitration, and any clause conferring exclusive power on one party to appoint an arbitrator is contrary to Section 12(5) and Schedule VII of the Act.
The petitioner relied heavily on TRF Ltd. v. Energo Engineering Projects Ltd. (2017) 8 SCC 377, Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2020) 20 SCC 760, and Bharat Broadband Network Ltd. v. United Telecoms Ltd. (2019) 5 SCC 755, to assert that once an appointing authority is ineligible under the Act, it cannot even nominate an arbitrator.
The petitioner also emphasized that participation in such proceedings cannot validate an inherently void appointment. Relying on Haryana Space Application Centre v. Pan India Consultants (2021) 15 SCC 1, it was contended that waiver under the proviso to Section 12(5) must be in writing and post-dispute; mere silence or participation cannot amount to consent.
Respondent’s arguments
The respondent opposed the petition, arguing that the petitioner had failed to raise objections at the appropriate time during the arbitration proceedings and was therefore estopped from challenging the award under Section 34. It was submitted that the petitioner’s conduct amounted to acquiescence, as it had knowledge of the appointment but did not approach the court for substitution at the time.
The respondent also claimed that the arbitration clause was part of a freely negotiated commercial contract, and therefore, the appointment mechanism must be respected. According to the respondent, the arbitrator had acted independently and fairly, and there was no actual bias proved by the petitioner.
Analysis of the law
The Court analyzed Section 12(5) and the Seventh Schedule of the Arbitration and Conciliation Act, observing that the provision was inserted by the 2015 Amendment Act to eliminate the influence of “interested parties” in the appointment process. The Court reiterated that any person with a professional, financial, or business relationship with a party is ineligible to serve as an arbitrator.
Relying on Perkins Eastman Architects DPC, the Court held that if a party is ineligible to act as an arbitrator, it is equally disqualified from unilaterally appointing one, as such power creates an indirect influence over the proceedings. The Judge noted that the intention behind Section 12(5) is to ensure “complete neutrality” in arbitral proceedings.
The Court also clarified that waiver of ineligibility must be post-dispute and in writing, as per the proviso to Section 12(5). Since there was no such written waiver in this case, the appointment stood invalid.
The Court further held that the arbitral award rendered by an ineligible arbitrator is a nullity and unenforceable in law under Section 34(2)(a)(v), which allows courts to set aside awards made by improperly constituted tribunals.
Precedent analysis
- TRF Ltd. v. Energo Engineering Projects Ltd. (2017) 8 SCC 377: The Supreme Court held that once a person is ineligible to act as an arbitrator, they cannot nominate another arbitrator. The principle of “indirect ineligibility” was applied.
- Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2020) 20 SCC 760: Extended the TRF principle to unilateral appointments, holding them inherently biased and void.
- Bharat Broadband Network Ltd. v. United Telecoms Ltd. (2019) 5 SCC 755: Clarified that waiver of ineligibility must be in writing and post-dispute.
- Proddatur Cable TV Digi Services v. Siti Cable Network Ltd. (2020 SCC OnLine Del 350): The Delhi High Court held that an arbitrator appointed by an interested party cannot continue, even if the proceedings have commenced.
- Haryana Space Application Centre v. Pan India Consultants (2021) 15 SCC 1: Reiterated that neutrality and independence are indispensable and cannot be waived orally.
By invoking these judgments, the Court concluded that the entire arbitral process was vitiated due to an invalid appointment mechanism.
Court’s reasoning
Justice Chandra Dhari Singh observed that the object of the 2015 Amendment to the Arbitration Act was to restore faith in arbitration as an impartial dispute resolution process. The amendment aimed to align Indian arbitration law with international standards of neutrality.
The Court reasoned that the respondent’s unilateral appointment power created a structural bias, as the appointing party was also a disputant. Such an arrangement, the Court said, “defeats the fundamental purpose of arbitration, which is to provide a fair and impartial forum.”
The Judge also rejected the respondent’s argument of waiver, holding that mere participation or delay cannot cure a jurisdictional defect. The absence of a written waiver rendered the proceedings incurably defective. The award was therefore void ab initio, and all consequential actions were declared null.
“Neutrality is not a procedural luxury but a substantive guarantee — once lost, the entire arbitral process collapses.”
Conclusion
The Delhi High Court set aside the arbitral award, declaring that the arbitrator’s appointment was void ab initio. It reiterated that unilateral appointments by an interested party are contrary to Section 12(5) and cannot be saved by consent or participation.
The Court directed that, if the parties desired to resolve the dispute through arbitration, they must approach the High Court under Section 11 for appointment of an independent and impartial arbitrator.
This ruling reinforces the Supreme Court’s jurisprudence ensuring neutrality and transparency in arbitration, safeguarding parties from procedural bias.
Implications
The judgment has far-reaching implications for corporate and commercial arbitration in India. It strengthens judicial scrutiny over unilateral appointments, ensuring that arbitrators are free from even perceived bias. The decision also reinforces that structural bias cannot be waived and that neutrality is indispensable to the validity of arbitral proceedings.
It serves as a reminder that contractual freedom in arbitration is subject to statutory safeguards ensuring fairness, and that arbitral awards made by ineligible arbitrators are inherently void.