2022 (12) TMI 1515 - HC - Indian Laws

Eligibility and impartiality of the Sole Arbitrator - Mandatory disclosure requirements u/s 12(1) of the Arbitration and Conciliation Act, 1996 - Unilateral appointment of the Arbitrator - Validity of the arbitral award - Appellant entered into a loan-cum-hypothecation agreement ('the Agreement') in respect of vehicle, with the respondent - HELD THAT - In terms of Explanation 1 to Section 12(1) of the A C Act-the grounds as stated in the Fifth Schedule of the A C Act-the learned Sole Arbitrator was required to be guided by the grounds as stated in the Fifth Schedule of the A C Act. Entry 22 of the Fifth Schedule of the A C Act specifically provides circumstances where an arbitrator has, within the past three years, been appointed as an arbitrator on more than two occasions by either of the parties or their affiliates. This Court is unable to accept that such a disclosure is not mandatory and is merely at the discretion of the arbitrator. The onus for disclosing the number of matters in which the learned Sole Arbitrator had been appointed as such, at the instance of the respondent, rested with the learned Sole Arbitrator. The assumption that the burden to ascertain the circumstances that may give rise to justifiable doubts as to the independence and impartiality of the arbitrators is on the parties, is erroneous; this disclosure is necessarily required to be made by the person approached in connection with his appointment as an arbitrator. In the present case, the learned Commercial Court had proceeded on the basis that the appellants are precluded from raising an objection as to the ineligibility of the arbitrator as no such application was made by the appellants before the Arbitral Tribunal. The learned Commercial Court has also faulted the appellants by not providing the full particulars as to the number of arbitrations conducted by the learned Sole Arbitrator for the respondent company in the past three years. In addition, the appellants have been faulted by the learned Commercial Court in not filing an application before the learned Sole Arbitrator, seeking a declaration as required u/s 12(5) of the A C Act. This Court is of the view that the approach of the learned Commercial Court is flawed. Unilateral appointment of the Arbitrator by the respondent is impermissible. The fact that the learned Sole Arbitrator had been engaged in a number of matters by the respondent is, concededly, a material fact that would raise justifiable grounds as to his independence and impartiality. Thus, in addition to being ineligible as an arbitrator u/s 12(5) of the A C Act, the grounds giving rise to justifiable doubts as to the independence and impartiality exist in the present case. The learned Sole Arbitrator was required to disclose in writing such circumstances which are likely to give rise to justifiable doubts as to his independence and impartiality, but he had failed to make any such disclosure. In our view, since the grounds giving rise to justifiable doubts as to impartiality exist, failure to make such disclosure vitiates the arbitral proceedings and the impugned award. Thus, the appeal is allowed. The impugned order as well as the impugned award are set aside.

Summary

Issues Involved:
1. Eligibility and impartiality of the Sole Arbitrator.
2. Mandatory disclosure requirements u/s 12(1) of the Arbitration and Conciliation Act, 1996.
3. Unilateral appointment of the Arbitrator.
4. Validity of the arbitral award.

Summary:

Eligibility and Impartiality of the Sole Arbitrator:
The appellants challenged the arbitral award on the grounds that the Sole Arbitrator was ineligible to act as an arbitrator u/s 12(5) of the A&C Act and alleged bias due to multiple appointments by the respondent. The Commercial Court rejected this contention, stating that no formal application challenging the appointment was filed by the appellants.

Mandatory Disclosure Requirements u/s 12(1) of the A&C Act:
The appellants argued that the Sole Arbitrator failed to make necessary disclosures as required u/s 12(1) of the A&C Act. The Commercial Court held that such disclosures were not mandatory unless the arbitrator felt there were justifiable doubts regarding his independence and impartiality. The High Court disagreed, emphasizing that the disclosure requirement is mandatory and not at the arbitrator's discretion.

Unilateral Appointment of the Arbitrator:
The High Court noted that the Sole Arbitrator was appointed unilaterally by the respondent without the appellants' concurrence, which is impermissible. The Court referenced the Supreme Court decisions in TRF Ltd. v. Energo Engineering Projects Ltd. and Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd., which held that unilateral appointments are invalid.

Validity of the Arbitral Award:
The High Court found that the Sole Arbitrator's failure to disclose his multiple appointments by the respondent raised justifiable doubts about his independence and impartiality, thereby vitiating the arbitral proceedings and the impugned award. Consequently, the High Court set aside both the impugned order and the arbitral award, allowing the appeal and directing the parties to bear their own costs.