Arbitration In IndiaAward passed by a Unilaterally Appointed Arbitrator liable to be Quashed

The Madras High Court in Prime Store India v. M/s SCM Silks Private Limited [Appeal Number 3867 of 2021, decided on 20.04.2023], held that the unilateral appointment of Arbitrator is disqualified under  Section 12(5) of the Arbitration and Conciliation Act (hereinafter referred to as “the A&C Act”) and hence, the Arbitral Award is liable to be quashed and set aside. It was also held that the ineligibility of an Arbitrator can be challenged under Section 34 of the A&C Act.

FACTS

M/s Prime Store (hereinafter referred as “the Petitioner No. 1”) is a partnership firm engaged  in the business of operating and running retail textile outlets in Tamil Nadu known as “The Chennai Silks.” Mr. S Kaarthi (hereinafter referred as “the Petitioner No. 2”), Mrs. Padma Sivalingam (hereinafter referred to as the “Petitioner No.3”)and Mrs. Shruthi Kaarthi (hereinafter referred as “the Petitioner No. 4”) are the partners in the Petitioner No.1.  Mr. K. Sivalingam (hereinafter referred to as the “Respondent No.2”) and M/s. SCM Silks Private Limited (hereinafter referred to as the “Respondent No.3”) retired from the Petitioner No.1 vide Partnership Release Deed on 11.09.2019 and 30.09.2019.

M/s. Sugam Vanijya Holdings Private Limited (hereinafter referred as “the Respondent No. 1”) is engaged in the business of developing and operating commercial projects and shopping malls.

Respondent No. 1 decided to develop a Mall, ‘VR-Chennai’ in Chennai. Petitioner No. 1 planned to open an e-commerce store and approached the Respondent No.1 for space on lease in the VR Chennai mall. The construction of the mall was completed on 20.04.2018 and the Petitioner No.1 and Respondent No.1 entered into  a lease deed on 12.09.2018 which was registered vide Doc. No. 3779 of 2018. The lease deed was amended on 25.09.2018 and certain changes were made in the terms and conditions.

The premises were handed over along with the possession notice for a period of 9  years with a lock-in period of 36 months i.e., from 30.11.2018 to 30.11.2021. However, the Petitioners terminated the lease deed due to unforeseen circumstances and claimed a refund of interest-free refundable security deposit of Rs.  75,75,480/- (Rupees Seventy-Five Lacs Seventy-Five Thousand Four Hundred and Eighty only) from Respondent No. 1.

The Respondent No.1 in turn claimed an amount of Rs. 11,88,16,397/- (Rupees Eleven Crores Eighty Eight Lacs Sixteen Thousand Three Hundred and Ninety-Seven only) towards rent for the lock-in period and fit-out expenses. As the dispute arose, the arbitration was invoked and envisaged under Clause 17.7(b) of the lease deed.

On 23.01.2019, the Respondent No.1, without seeking the consent of the  Petitioners, appointed an Arbitrator unilaterally.  The Respondent No. 1 had raised five claims and the Sole Arbitrator passed an award on 22.03.2021, partly allowing the claims of the Respondent No.1 and rejecting the claims of the Petitioner (hereinafter referred to as the “Impugned Award”).

ISSUES  BEFORE THE HIGH COURT

1. Whether the unilateral appointment of the Sole Arbitrator without the express agreement is valid under the A&C Act?

2. Whether the participation of the Petitioners in the Arbitral proceedings will be considered as waiver of rights as per the proviso of Section 12(5) of the A&C Act?

3. Whether the disqualification of the Arbitrator can be challenged under Section 34 of the A&C Act after the passing of an Arbitral Award?

CONTENTIONS OF THE PARTIES

The Petitioners argued that the appointment of the Sole Arbitrator is de jure and ineligible. Further, as per the Section 34 of the A&C Act the Impugned Award is violative of the basic and fundamental principles of natural justice and hence, shall be quashed and set aside.

The Petitioner contended that the Impugned Award is inconsiderate of the facts and the Sole Arbitrator has merely favoured the Respondent No.1 without appreciating the documents or facts on record. It was also contended that the Sole Arbitrator had not recorded any express waiver of the Petitioner. Moreover the present case violates Section 12(5) of the A&C Act because the Arbitral Tribunal was established in violation of that provision and Schedule VII of the A&C Act.

The Respondent No. 1 did not present any supportive evidence or documents for the claim amount. Even then, the Sole Arbitrator had put the burden on the Petitioner and also levied an exorbitant interest of 24%.

The Petitione argued that even though Clause 17.7(b) of the lease deed permits the Respondent to appoint a Sole Arbitrator, the Respondent should have adhered with the provisions of Section 12(5) of the A&C Act while appointing the Arbitrator as to avoid unfairness and arbitrariness in the arbitration proceedings. Additionally, the Section 12 r/w Schedule VII of the A&C Act, an Arbitrator who has been unilaterally appointed is de jure disqualified to serve in that capacity.

The Petitioners further submitted that as the Respondent No.1 unilaterally appointed an Arbitrator, violative of the provisions of  Section 12(5) r/w Schedule VII of the A&C Act, the Impugned Award shall be quashed and set aside.

The Respondent No.1 contended that the Clause 14.3(b) of the lease deed enumerates that in case the Petitioner terminates the lease deed before the expiry of the lock-in period, the Petitioner is required to issue a prior notice of 6 months and 100% of the remaining rent to be paid and Clause 4 of the addendum provides that 50% of CAM  charges rent for the remaining term to be paid as well.

It was further argued that the Petitioners did not raise any objective regarding the unilateral appointment of the Arbitrator during the course of the Arbitral Proceedings. Moreover, the Sole Arbitrator appointed was a retired judge of High Court and hence, no bias can be apprehended.

It was contended that the Petitioners accepted the appointment and also actively participated in the arbitral proceedings. Furthermore, Section 4 of the A&C Act does not provide for the requirement of any “express waiver”. Hence, the Impugned Award does not require any interference.

DECISION AND FINDINGS

The High Court observed the provision of Section 12 of the A&C Act lays down the conditions for the appointment of an Arbitrator. It was also observed that prior to the Arbitration and Conciliation (Amendment) Act, 2015, the unilateral appointment of Arbitrator was allowed, but the Amendment Act widened the grounds of challenge of the Arbitral Tribunal under Section 12 of the A&C Act. The High Court relied on TRF Ltd. v. Energo Engineering Projects Ltd., [(2017) 8 SCC 377] and Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd [2019 SCC Online SC 1517] and held that the person stated in the Section 12 and Schedule VII of the A&C Act would be ineligible to be appointed as an Arbitrator. Further, in the present case, there is no express consent of the Petitioner for the appointment of the Sole Arbitrator and the Petitioner have also participated in the proceedings. The High Court held that the Sole Arbitrator unilaterally appointed by the Respondent is ineligible and hence, becomes de jure to perform his functions as per the provisions of Section 12(5) r/w Schedule VII of the A&C Act.

The Court further observed that the Petitioner did not provide any agreement in writing in accordance with the proviso of Section 12(5) of the A&C Act to waive their right. Moreover, the Sole Arbitrator also should not have proceeded with the proceedings without the consent of the Petitioner. It was held that an award passed in such proceedings shall be quashed and set aside.  Hence, the Petitioners had not waived off their right to object the appointment of Arbitrator in terms of proviso of Section 12(5) of the A&C Act.

The Court further observed that when an authority exercises jurisdiction beyond the authority, it is a nullity in law and hence, it can be acted upon. It was held that the Sole Arbitrator was ineligible as per the Section 12(5) r/w Schedule VII of the A&C Act and due to his ineligibility, the Impugned Award deserves to be quashed and set aside. The Court relied on Hindustan Zinc Ltd. v. Ajmer Vidyut Vitran Nigam Ltd.  [(2019) 17 SCC 82] and held that the ineligibility of an Arbitrator can also be challenged under Section 34 of the A&C Act.

The High Court opined that the Petitioners did not waive off their right to object the unilateral appointment of the Arbitrator. The Respondent No.1 has not provided any time limit to the Petitioners to give consent in the notice issued under Section 21 of the A&C Act. The Court held that the appointment of the Arbitrator is non est in law and hence, the Impugned Award was quashed and set aside. The Court further appointed Hon’ble Mr. Justice N. Kirubakaran (Rtd.) as an Arbitrator under the powers of Section 11(6) of the A&C Act.

AMLEGALS REMARKS

The Madras High Court has upheld the provision relating to the appointment of the Arbitrator and adhering to the principles of natural justice. An Arbitrator cannot be unilaterally appointed as it is violative of Section 12 r/w Schedule VII of the A&C Act. Furthermore, the ineligibility of an Arbitrator can be challenged under Section 34 of the A&C Act. The Arbitral Award was quashed and set aside as the Arbitrator was unilaterally appointed and it was in violation of principles of natural justice as well as the legislative intent. Hence, unilateral appointment of Arbitrator is bad in law and hence, the award was quashed and set aside

– Team AMLEGALS assisted by Ms. Aayushi Udeshi (Intern)

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