UNILATERAL APPOINTMENT OF ARBITRATOR IS non-est IN LAW

[Mr. M. GOVINDARAJAN]

In ‘HINA SUNEET SHARMA AND SUNEET SHARMA VERSUS M/S. NISSAN RENAULT FINANCIAL SERVICES INDIA PRIVATE LIMITED - 2023 (4) TMI 315 - MADRAS HIGH COURT  the petitioners borrowed a sum of Rs.4,77,014/- from the respondents by loan-cum-hypothecation agreement, dated 27.11.2019 for the purchase of a car on the EMI Rs.9900/- per month. The petitioners paid the dues from January 2020 to November 2020.  Thereafter they did not pay the dues.  The respondents thereafter unilaterally appointed a sole arbitrator on 05.02.2021 by referring clauses in the agreement.  The arbitrator conducted the arbitration proceedings and passed an award on 30.08.2021. 

The petitioner challenged the arbitral award before the High Court.  The petitioner submitted the following before the High Court-

• The respondent unilaterally appointed the arbitrator vide letter dated 05.02.2021.
• The arbitrator has not send any notice to the petitioners and the respondent has not served any claim of statement filed before the Arbitrator.
• Without getting the counter from the petitioner the Arbitrator passed ex-parte award.
• In the event of any unilateral appointment of arbitrator without the consent of the other party, the same would be non-est in law. 
• The petitioner did not make any waiver for the unilateral appointment of arbitrator under the proviso to Section 12(5) of the Arbitration and Conciliation Act, 1996 (‘Act’ for short) and therefore the appointment of arbitrator is null and void.
• Since the unilateral appointment is contrary to proviso to section 12 (5) of the Act the same would fall under Explanation (2) of Section 34(2)(b) of the Act and it is in contravention with the fundamental policy of law.
• Since no opportunity has been given to the petitioner, the arbitrator award is liable to be set aside.

The respondent submitted the following before the High Court-

• If there is any unilateral appointment the remedy available to the petitioner is to challenge the same before the Arbitral Tribunal.
• The petitioner did not avail the aforesaid remedy and therefore he cannot raise the issue of unilateral appointment of arbitrator at this state and therefore the writ petition is liable to be dismissed.

The High Court heard the submissions made by both the parties.  The High Court observed that according to the clause 20 of the agreement the respondent has option for the appointment of sole arbitrator at their discretion.   The authorized representative of the respondent nominated the  arbitrator unilaterally without consent of the petitioner. 

The High Court further observed that the person appointed as arbitrator is neither the employee, consultant, advisor or have any other past or present business relationship or manager, director or part of the management of the respondent.  If any of the above persons appointed as arbitrator, those persons are ineligible to act as an arbitrator in terms of section 12() of the Act.  In the same way the above persons are also not eligible to nominate any person as arbitrator to act on behalf of them.  The High Court, therefore, was of the view that the unilateral appointment of arbitrator by the respondent is in violation of section 12(5) of the Act. 

The High Court relied on the judgment of Supreme Court in PERKINS EASTMAN ARCHITECTS DPC & ANOTHER VERSUS HSCC (INDIA) LTD. - 2019 (11) TMI 1154 - SUPREME COURT  In this case the Supreme Court was concerned with the issue as to whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator.  The ineligibility was as a result of operation of law, in that a person having an interest or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator. In case where only one party has a right to appoint a sole arbitrator, it choice will always have an element of exclusivity in determining or charting the Arbitration application.  Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator.  The Supreme Court held that the unilateral appoint of arbitrator is non-est in law.

The High Court then considered the question for its consideration - ‘if the petitioners are participated in the arbitral proceedings or after having the knowledge of the appointment of the sole Arbitrator failed to challenge the said appointment in terms of Section 13 of the Act, would the same deprive the rights of the petitioners to challenge the said appointment of the Arbitrator in terms of the provisions of Section34 of the Act for violation of provisions of Section 12(5) of the Act?’

For the above question the answer of the High Court is ‘No’.  In this regard the High Court held that-

• The petitioner can certainly entitled to challenge under Section 34 of the Act, if there is any violation of the provisions of the Act.
• Even though the petitioners have not challenged the unilateral appointment of the sole arbitrator under section 13 of the Act, it would not take away the rights of the petitioners to challenge under Section 34 of the Act.
• Even if there is any participation by the petitioners in the arbitral proceedings, the petitioners still have the right to challenge about the violations of the provisions of section 12(5) of the Act under section 34 of the Act.

The High Court observed that in the present case, apart from appointing the arbitrator unilaterally by the respondent, the Arbitrator had also failed to send any notice about the hearing to the petitioners and the respondents had also failed to furnish the claim statement to the petitioners.  Therefore the petitioners did not have any opportunity to file the counter and contest the matter.  Even if the petitioners have filed the counter and considered, the present award is liable to be set aside for the violations of the provisions of Section 12(5) of the Act.

The High Court held that the present arbitral award is not sustainable under law since the award has been passed without giving any reasonable opportunities to the petitioner and the same is liable to be set aside as it is against the public policy of India and it violates the principles of Natural Justice.