Calcutta High Court Strikes Down Arbitration Award Passed by Unilaterally Appointed Arbitrator

Calcutta High Court Strikes Down Arbitration Award Passed by Unilaterally Appointed Arbitrator

In a recent case [Cholamandalam Investment and Finance Co. Ltd. v/s Amrapali Enterprises and anr.], the Calcutta High Court emphasized that arbitral awards rendered by an arbitrator unilaterally appointed by only one party to the arbitral dispute are considered null and void and cannot be enforced by law.

Justice Shekhar B Saraf, while rejecting a petition for the enforcement of an arbitral award, observed that the award was rendered ex parte and by a sole arbitrator appointed unilaterally by only one of the parties involved in the dispute. The Court held that such awards are considered non-existent in the eyes of the law.

According to the Court's explanation, such appointments are considered invalid due to the possibility of bias towards the appointing party. This would violate Section 12(5) of the Arbitration Act, 1996, which pertains to the disqualification or ineligibility of individuals to be appointed as arbitrators, in conjunction with Schedule VII of the Act.

The Court also noted that an appointment made unilaterally would not withstand a challenge made under Section 34 of the Arbitration Act. The Court emphasised that such appointments and the subsequent award and process cannot be validated at any later stage, thereby rendering the entire arbitral proceedings null and void ab initio.

As a result, the Court ruled that an award passed by an arbitrator appointed unilaterally can be set aside even when considering a plea under Section 36 of the Arbitration Act to execute the award.

The Court drew a parallel to case law under Section 47 of the Code of Civil Procedure (CPC) and stated that decrees passed by bodies lacking inherent jurisdiction are unenforceable. In such cases, it would be considered as if no decree existed at all.

“Impartiality as discussed is the paramount principle of arbitral proceedings and something which the Courts have to safeguard at every stage of such proceedings. Even at the stage of execution, the lady of justice cannot turn a blind eye and let one party run over the other … Shackles of procedural limitation in such cases will not prevent parties from seeking the immunity of the Court,” Justice Saraf noted in the judgement order.

The Court stated that parties who make such unilateral appointments often use procedural technicalities to cover up their unlawful actions and gain an advantage from their mischief.

As a result, even if an award is not set aside under the procedure established in Section 34 of the Act, the Court can intervene at the execution stage and declare a "unilateral appointment award" as non-existent in the eyes of the law, null and void. The Court can also direct the parties to re-agitate their issues before a new arbitral tribunal that is constituted in accordance with the law, the judgement added.

According to the Court, this judgment is limited to awards passed in arbitral proceedings that began after the 2015 amendment to the Arbitration Act, which added Section 12(5) regarding the disqualification or ineligibility of persons to be appointed as arbitrators.

In concluding the judgment, the Court highlighted that the 2015 amendment was introduced to address the issue of impartiality in arbitral proceedings that arose due to finance companies and banks unilaterally appointing a "small cabal of arbitrators."

The Court noted that a virus had emerged where finance companies and banks were facilitating such appointments in hundreds of cases for themselves, resulting in awards that were biased and tainted. The judge emphasized that borrowers were often the underdogs in these situations as they had no say in the appointment of arbitrators, and the concept of impartiality was disregarded.

“In order to overcome this issue, the legislative amendments of 2015 and the judicial pronouncements on such amendments by the Apex Court have brought in a level playing field so that no party could have a higher bargaining power in the decision-making process for appointment of an arbitrator,” Justice Saraf remarked.

However, the Court also pointed out that the proviso to Section 12 (5) of the Act permits parties to waive such disqualifications while appointing arbitrators, as long as the waiver is explicitly stated and in writing.

The Court was presented with a case under Section 36 of the Arbitration Act by Cholamandalam Investment and Finance Company Ltd., seeking to enforce an award in their favour passed by a sole arbitrator appointed unilaterally by the finance company. The award was issued against Amrapali Enterprises, which had taken a loan from Cholamandalam Investment and Finance Company Ltd.

Cholamandalam Investment and Finance Company Ltd were represented by advocates Pratip Mukherjee and Ranjit Singh, while advocate Sk. Sariful Haque appeared for Amrapali Enterprises in the case before the High Court.