Delhi District Court
Sonu Tyagi vs Sony India Private Limited on 18 May, 2023
IN THE COURT OF SH. AJAY KUMAR JAIN:
DISTRICT JUDGE COMMERCIAL COURT 03 SOUTH EAST
DISTRICT, SAKET COURTS, NEW DELHI.
IN THE MATTER OF:
OMP (COMM) NO. 112/19
1. Sonu Tyagi
45, Vivek Vihar,
Near National Bank, Haridwar
Uttrakhand
2. Tirupati Enterprises
Through its proprietor
Sonu Tyagi
45, Vivek Vihar
Near National Bank, Haridwar,
Uttrakhand ....Petitioners.
Versus
Sony India Private Limited
Office At:
A-18, Mohan Co-operative Industrial Estate,
Mathura Road, New Delhi- 110044
Through its Managing Director/Director/
Company Secretary ....Claimant/Respondent
Date of Institution : 18.10.2019
Date of Arguments : 17.05.2023
Date of Judgment : 18.05.2023
OMP (COMM) 112/19
Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 1 of 40
Vs. Sony India Private Limited
JUDGMENT
1. Vide this judgment, I shall dispose of the petition under Section 34 of the Arbitration and Conciliation Act to set aside the arbitral award dated 18.07.2019 passed against the petitioner by the Ld. Sole Arbitrator.
2. Brief facts of the case are that claimant/respondent is a private limited company which is inter-alia engaged in the business of marketing of consumer audio visual, electronic and various other products. Claimant/respondent company entered into a service agreement with respondent no. 1/petitioner no. 1 and appointed respondent no. 2/petitioner no. 2 as the authorized service center engaging in repair of Sony products and consumer durables. The said agreement was signed by respondent no. 2/petitioner no. 2 who is the director of the respondent no. 1/petitioner no. 1. Under the terms of agreement, various free of cost parts and products for replacement, jigs, and tools etc. were supplied to the respondents/petitioners by claimant/respondent for in-warranty services. Thereafter, the dispute occurred in the matter as respondents/petitioners indulged in unethical practices i.e. not using free of cost parts and products towards the jobs. Claimant/respondent sent many notices to the respondents/petitioners but respondents/petitioner neither replied nor took any steps to settle the issue. Thereafter, claimant/respondent appointed Sole Arbitrator on 25.08.2018, counsel for petitioners raised question on the appointment OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 2 of 40 Vs. Sony India Private Limited of the Sole Arbitrator, however, it was addressed. The petitioners during the arbitration proceedings stopped appearing therefore proceeded ex- parte on 01.04.2019. Then conclusion of proceedings, the impugned award dated 18.07.2019 was passed.
3. Ld. Counsel for the petitioner submitted that the petitioner has challenged the jurisdiction of appointment of the arbitrator during arbitration proceedings, however, arbitrator rejected the objection. Ld. Counsel submits that the appointment of the arbitrator by the claimant in terms of arbitration clause post 2015 amendment is bad in law and not permissible (relied upon 'TRF Ltd. Vs. Energo Engineering Projects Ltd., C.A No. 5306 of 2017 dt. 03.07.2017, Perkins Eastman Architects DPC Vs. HSCC (India) Ltd., (2020) 20 SCC 760 : 2019 SCC OnLine SC 1517 : (2020) 2 ALD 140 : AIR 2020 SC 59 1, Geeta Paddar Vs. Satya Developers Pvt. Ltd. Arb P. 133/2019 and Simi Sethi Vs. Fullerton India Credit Co. Ltd., OMP (COMM) 334/2021). Ld. Counsel submits that in view thereof the impugned award is liable to be set aside.
4. Ld. counsel for the claimant/respondent submits that the arguments of unilateral appointment of arbitrator cannot be taken by the respondents/petitioners as not pleaded in the grounds raised in petition under section 34 of Arbitration and Conciliation Act. Ld. Counsel further submits that respondents/petitioners have participated in the arbitration proceedings, therefore, cannot raised the said objection now (relied upon 'Kanodia Infratech Limited Vs. Dalmia Cement (Bharat) Limited, OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 3 of 40 Vs. Sony India Private Limited MANU/DE/2954/2021, dt. 08.11.2021'). Ld. Counsel further submits that Hon'ble High Court of Calcutta in case title 'McLeod Russel India Limited and Ors. Vs. Aditya Birla Finance Limited and Ors., MANU/WB/0262/2023, dt. 14.02.2023' also held that in all circumstances, the unilateral appointment of the Arbitrator cannot be a ground to set-aside the award. In present case, the impartiality and independence of the Arbitrator is not in dispute and he has not conducted any previous arbitration for the claimant nor the employee of the claimant or associated in any manner with the claimant. Ld. Counsel submits that the award is a reasoned and detailed award and no ground made out in terms of U/s 34 of Arbitration and Conciliation Act, to set aside the award.
5. Written submissions also filed by petitioners.
6. Arguments heard. Record perused.
7. As per the arbitration agreement, the relevant clause on the basis of which the arbitration proceedings were initiated is reproduced as under:-
"..Any disputes arising out of or relating to this Agreement shall, in the first instance be attempted to be resolved amicably between the parties. In the event of failure to mutually resolve the dispute, the matter shall be referred for arbitration by a sole Arbitrator to be nominated by Sony India. The proceedings shall be conducted in accordance with the procedure set out under the provisions of the Arbitration and Conciliation Act 1996 as amended or modified from time to time. The proceedings shall be in English. The seat of Arbitration Shall be at New Delhi..."
OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 4 of 40 Vs. Sony India Private Limited
8. The bare perusal of the clause of the agreement shows that any dispute in relation to the agreement if unresolved then the dispute shall be referred to the arbitration. The Arbitrator shall be nominated by the claimant, however, post 2015 amendment in the Act, this clause is ex- facie bad and is in contravention of the provision of the Arbitration and Conciliation Act which goes to the root of the matter and arbitrator become de jure ineligible to act as an arbitrator by operation of law.
9. Three concepts found in the Arbitration Act that facilitate the continuing presence of an independent and impartial arbitral tribunal:
1. Ineligibility of arbitrators - Section 12(5) of the Arbitration Act,
2. Disclosure by arbitrators - Sections 12 (1) and 12 (2) of the Arbitration Act,
3. Challenge to arbitrators - Sections 12(3), 12 (4) and 13 of the Arbitration Act.
Pursuant to the Proviso to Section 12(5) of the 1996 Act, parties may waive the applicability of Section 12(5) by an express agreement in writing post the dispute having arisen. This condition of the agreement being expressly in writing is the statutory sine qua non, without which an otherwise ineligible person cannot be free from the effect of Section 12(5). Nothing less of an 'express agreement in writing would suffice for the waiver of the application of Section 12(5). Such a waiver precluding the application of Section 12(5) cannot be compelled from a party.
OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 5 of 40 Vs. Sony India Private Limited
10. The relevant paras of the judgment of Hon'ble Kerala High Court dealing with the similar issue in case title 'Hedge Finance Private Limited Vs. Bijish Joseph, OP (C) No. 1263 of 2022 dated 02.08.2022' observed as under :-
"....18. Section 12 of the Act has been interpreted by the Hon'ble Supreme Court in Voestalpine Schienen GmbH v. Delhi Metro Rail Corporation Ltd in the following paragraphs:
"18. Keeping in mind the aforequoted recommendation of the Law Commission, with which spirit, Section 12 has been amended by the Amendment Act, 2015, it is manifest that the main purpose for amending the provision was to provide for neutrality of arbitrators. In order to achieve this, sub-section (5) of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject-matter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator. In such an eventuality i.e. when the arbitration clause finds foul with the amended provisions extracted above, the appointment of an arbitrator would be beyond pale of the arbitration agreement, empowering the court to appoint such arbitrator(s) as may be permissible. That would be the effect of non obstante clause contained in sub-section (5) of Section 12 and the other party cannot insist on appointment of the arbitrator in terms of the arbitration agreement.
xxx xxx xxx xxx "20. Independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which applied to all judicial and quasi-judicial proceedings. It is for this reason that notwithstanding the fact that relationship between the parties to the arbitration and the arbitrators themselves are contractual in nature and the source of an arbitrator's appointment is deduced from the agreement entered notwithstanding the into same between the non-independence parties, and non- impartiality of such arbitrator (though contractually agreed upon) would render him ineligible to OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 6 of 40 Vs. Sony India Private Limited conduct the arbitration. The genesis behind this rational is that even when an arbitrator is appointed in terms of contract and by the parties to the contract, he is independent of the parties. Functions and duties require him to rise above the partisan interest of the parties and not to act in, or so as to further, the particular interest of either parties. After all, the arbitrator has adjudicatory role to perform and, therefore, he must be independent of parties as well as impartial. The United Kingdom Supreme Court has beautifully highlighted this aspect in Hashwani v. Jivraj [Hashwani v. Jivraj, (2011) 1 WLR 1872 : 2011 UKSC 40] in the following words : (WLR p. 1889, para 45) '45. ... the dominant purpose of appointing an arbitrator or arbitrators is the impartial resolution of the dispute between the parties in accordance with the terms of the agreement and, although the contract between the parties and the arbitrators would be a contract for the provision of personal services, they were not personal services under the direction of the parties.'
21. Similarly, Cour de Cassation, France, in a judgment delivered in 1972 in Consorts Ury [Fouchard, Gaillard, Goldman on International Commercial Arbitration, 562 [Emmanuel Gaillard & John Savage (Eds.) 1999] {quoting Cour de cassation [Cass.] [Supreme Court for judicial matters] Consorts Ury v. S.A. des Galeries Lafayette, Cass. 2e civ., 13-4- 1972, JCP, Pt. II, No. 17189 (1972) (France)}.] , underlined that:
'an independent mind is indispensable in the exercise of judicial power, whatever the source of that power may be, and it is one of the essential qualities of an arbitrator'.
22. Independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 7 of 40 Vs. Sony India Private Limited arbitrator, while partiality will more likely surface during the arbitration proceedings.
xxx xxx xxx xxx xxx
30. Time has come to send positive signals to the international business community, in order to create healthy arbitration environment and conducive arbitration culture in this country. Further, as highlighted by the Law Commission also in its report, duty becomes more onerous in government contracts, where one of the parties to the dispute is the Government or public sector 18 O.P (C)No.1263 of 2022 undertaking itself and the authority to appoint the arbitrator rests with it. xxx xxx xxxx".
19. Subsequently, a three Judge Bench of the Hon'ble Supreme Court in TRF Ltd v.Energo Engineering Projects Ltd has declared thus:
"50. First, we shall deal with Clause (d). There is no quarrel that by virtue of Section 12(5) of the Act, if any person who falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as the arbitrator. There is no doubt and cannot be, for the language employed in the Seventh Schedule, the Managing Director of the Corporation has become ineligible by operation of law. It is the stand of the learned senior counsel for the appellant that once the Managing Director becomes ineligible, he also becomes ineligible to nominate. Refuting the said stand, it is canvassed by the learned senior counsel for the respondent that the ineligibility cannot extend to a nominee if he is not from the Corporation and more so when there is apposite and requisite disclosure. We think it appropriate to make it clear that in the case at hand we are neither concerned with the disclosure nor objectivity nor impartiality nor any such other circumstance. We are singularly concerned with the issue, whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator. At the cost of repetition, we may state that when there are two parties, one may nominate an arbitrator and the other may appoint another. That is altogether a different situation. If there is a clause requiring the parties to nominate their respective arbitrator, their authority to nominate cannot be questioned. What really in that circumstance can be called in question is the procedural OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 8 of 40 Vs. Sony India Private Limited compliance and the eligibility of their arbitrator depending upon the norms provided under the Act and the Schedules appended thereto. But, here is a case where the Managing Director is the "named sole arbitrator" and he has also been conferred with the power to nominate one who can be the arbitrator in his place. Thus, there is subtle distinction. (omitted).
xxx xxxx xxx xxx xxx xxx
53. The aforesaid authorities have been commended to us to establish the proposition that if the nomination of an arbitrator by an ineligible arbitrator is allowed, it would tantamount to carrying on the proceeding of arbitration by himself. According to learned counsel for the appellant, ineligibility strikes at the root of his power to arbitrate or get it arbitrated upon by a nominee.
54. In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so".
20. Again, in Bharat Broadband Network Ltd vs. United Telecoms Ltd the Hon'ble Supreme Court has held as follows:
"14. From a conspectus of the above decisions, it is clear that Section 12(1), as substituted by the Arbitration and Conciliation (Amendment) Act, 2015 ["Amendment Act, 2015"], makes it clear that when a person is approached in connection with his OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 9 of 40 Vs. Sony India Private Limited possible appointment as an arbitrator, it is his duty to disclose in writing any circumstances which are likely to give rise to justifiable doubts as to his independence or impartiality. The disclosure is to be made in the form specified in the Sixth Schedule, and the grounds stated in the Fifth Schedule are to serve as a guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator. Once this is done, the appointment of the arbitrator may be challenged on the ground that justifiable doubts have arisen under sub-section (3) of Section 12 subject to the caveat entered by sub- section (4) of Section
12. The challenge procedure is then set out in Section 13, together with the time limit laid down in Section 13(2). What is important to note is that the arbitral tribunal must first decide on the said challenge, and if it is not successful, the tribunal shall continue the proceedings and make an award. It is only post award that the party challenging the appointment of an arbitrator may make an application for setting aside such an award in accordance with Section 34 of the Act.
15. Section 12(5), on the other hand, is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non- obstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The sub-section then declares that such person appointed as arbitrator. shall be "ineligible" to be The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, in law, is that parties may after disputes have arisen between them, waive the applicability of this sub- section by an "express agreement in writing". Obviously, the "express agreement in writing" has reference to a person who OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 10 of 40 Vs. Sony India Private Limited is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the Seventh Schedule.
16. The Law Commission Report, which has been extensively referred to in some of our judgments, makes it clear that there are certain minimum levels of independence and impartiality that should be required of the arbitral process, regardless of the parties' agreement. This being the case, the Law Commission then found:
"59. The Commission has proposed the requirement of having specific disclosures by the arbitrator, at the stage of his possible appointment, regarding existence of any relationship or interest of any kind which is likely to give rise to justifiable doubts. The Commission has proposed the incorporation of the Fourth Schedule, which has drawn from the Red and Orange lists of the IBA Guidelines on Conflicts of Interest in International Arbitration, and which would be treated as a "guide" to determine whether circumstances exist which give rise to such justifiable doubts. On the other hand, in terms of the proposed section 12 (5) of the Act and the Fifth Schedule which incorporates the categories from the Red list of the IBA Guidelines (as above), the person proposed to be appointed as an arbitrator shall be ineligible to be so appointed, notwithstanding any prior agreement to the contrary. In the event such an ineligible person is purported to be appointed as an arbitrator, he shall be de jure deemed to be unable to perform his functions, in terms of the proposed explanation to section 14. Therefore, while the disclosure is required with respect to a broader list of categories (as set out in the Fourth Schedule, and as based on the Red and Orange lists of the IBA Guidelines), the ineligibility to be appointed as an arbitrator (and the consequent de jure inability to so act) follows from a smaller and more serious sub-set of situations (as set out in the Fifth Schedule, and as based on the Red list of the IBA Guidelines).
60. The Commission, however, feels that real and genuine party autonomy must be respected, and, in certain situations, parties should be allowed to waive even the categories of ineligibility as set in the proposed Fifth Schedule. This could be in OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 11 of 40 Vs. Sony India Private Limited situations of family arbitrations or other arbitrations where a person commands the blind faith and trust of the parties to the dispute, despite the existence of objective "justifiable doubts"
regarding his independence and impartiality. To deal with such situations, the Commission has proposed the proviso to section 12 (5), where parties may, subsequent to disputes having arisen between them, waive the applicability of the proposed section 12 (5) by an express agreement in writing. In all other cases, the general rule in the proposed section 12 (5) must be followed. In the event the High Court is approached in connection with appointment of an arbitrator, the Commission has proposed seeking the disclosure in terms of section 12 (1), and in which context the High Court or the designate is to have "due regard" to the contents of such disclosure in appointing the arbitrator." (emphasis in original) Thus, it will be seen that party autonomy is to be respected only in certain exceptional situations which could be situations which arise in family arbitrations or other arbitrations where a person subjectively commands blind faith and trust of the parties to the dispute, despite the existence of objective justifiable doubts regarding his independence and impartiality".
21. Recently, in Perkins Eastman Architects DPC and another vs. HSCC (India) Ltd, the Hon'ble Supreme Court has in paragraphs 20 and 21 held as follows:
"20. We thus have two categories of cases. The first, similar to the one dealt with in TRF Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72] where the Managing Director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the Managing Director is not to act as an arbitrator himself but is empowered or authorised to appoint any other person of his choice or discretion as an arbitrator. If, in the first category of cases, the Managing Director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be the test, similar invalidity would always arise and spring even in the second category of cases. If the interest that he has in the outcome of OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 12 of 40 Vs. Sony India Private Limited the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases. We are conscious that if such deduction is drawn from the decision of this Court in TRF Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72] , all cases having clauses similar to that with which we are presently concerned, a party to the agreement would be disentitled to make any appointment of an arbitrator on its own and it would always be available to argue that a party or an official or an authority having interest in the dispute would be disentitled to make appointment of an arbitrator.
21. But, in our view that has to be the logical deduction from TRF Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72] Para 50 of the decision shows that this Court was concerned with the issue, "whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator". The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute 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. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter- balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. 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. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) and recognised by the decision of this Court in TRF OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 13 of 40 Vs. Sony India Private Limited Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377: (2017) 4 SCC (Civ) 72]".
22. On an analysis of the amended provisions of the Arbitration and Conciliation Act, 1996 and the exposition of the law laid down by the Hon'ble Supreme Court in the afore-cited decisions, it is abundantly clear that the law mandates that there should be neutrality not only for the Arbitrator but also in the arbitrator selection process as well. Thus, in the post- 2015 amendment era, there are only two modes of appointment of a sole Arbitrator (i) by express agreement in writing between the parties, post the dispute, agreeing to waive the applicability of Section 12 of the Act or (ii) by order of appointment by the High Court under Section 11 of the Act. If the appointment of a sole arbitrator is made other than by the above two methods, the appointment is ex facie bad and is in contravention of the provisions of the Act, which goes to the roots of the matter, and the Arbitrator becomes de jure ineligible to act as an arbitrator by the operation of law.
23. Then the question would arise, can an interim award passed by an ineligible Arbitrator be enforced through a Court under Section 17 (2) of the Act. The law laid down in Chiranjilal Shrilal Goenka, TRF Ltd. (supra) and Mantoo Sarkar v. Oriental Insurance Co. Ltd and others [(2009) 2 SCC 244] and Sneh Lata Goel v. Pushplata and others [ (2019) 3 SCC 594] is sufficient to fortify the elementary principle that a decree passed by the Court without jurisdiction goes to the very roots of the matter and the decree is a nullity. Thus, I have no doubt in my mind that an interim award passed by an arbitrator who was appointed in contravention of the provisions of the Act and the law laid down by the Honourable Supreme Court extracted above, is bad in law and as a corollary to the same, the award is unenforceable. It should be borne in mind that the enforcement of an award is a serious matter and the court is cast with the responsibility to ascertain whether the interim award is passed by an arbitrator who is competent to be appointed in accordance with law. As observed in TRF Ltd, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Therefore, the interim award becomes worthless...."
OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 14 of 40 Vs. Sony India Private Limited
11. As per mandate of the this judgment, based upon various judgments of the Hon'ble Supreme Court, there should be neutrality not only for the arbitrator but also in the arbitration selection process as well. In the post 2015, amendment era there are only two modes of appointment of sole arbitrator (i) by express agreement in writing between the parties, post the disputes, agreeing to waive the applicability of section 12 of the Act or by order of appointment by High Court under section 11 of the Act. If the appointment is made other than by the two methods the said appointment is ex-facie bad and is in contravention of the Act. The arbitrator become dejure ineligible to act as an arbitrator by operation of law. In present case, the arbitration clause clearly gives mandate to the respondent to unilaterally appoint the arbitrator which is bad in law post amendment, and admittedly after the dispute there is no express agreement in writing between the parties to waive the applicability of section 12 (5). The consent envisaged for waiver is express agreement of waiver which is completely missing in the present case. Hon'ble Apex Court in 'Bharat Broadbrand Network Limited Vs. United Telecoms Limited, (2019) 5 SCC 755' held as under :
"......20.This then brings us to the applicability of the proviso to Section 12(5) on the facts of this case. Unlike Section 4 of the Act which deals with deemed waiver of the right to object by conduct, the proviso to Section 12(5) will only apply if subsequent to disputes having arisen between the parties, the parties waive the applicability of sub-section (5) of Section 12 by an express agreement in writing. For this reason,the argument based on the analogy of Section 7 of the Act must also be rejected. Section 7 deals with arbitration agreements that OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 15 of 40 Vs. Sony India Private Limited must be in writing, and then explains that such agreements may be contained in documents which provide a record of such agreements. On the other hand, Section 12(5) refers to an "express agreement in writing". The expression "express agreement in writing" refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct. Here, Section 9 of the Indian Contract Act, 1872 becomes important. It states:
"9. Promises, express and implied.--In so far as a proposal or acceptance of any promise is made in words,the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words,the promise is said to be implied."It is thus necessary that there be an "express" agreement in writing. This agreement must be an agreement by which both parties, with full knowledge of the fact that Shri Khan is ineligible to be appointed as an arbitrator, still go ahead and say that they have full faith and confidence in him to continue as such......."
12. Hon'ble Supreme Court in case title 'Ellora Paper Mills Limited Vs. The State of Madhya Pradesh, Civil Appeal No. 7697 OF 2021, dt 04.01.2022' reproduced as under :
"..18. Keeping in mind the aforequoted recommendation of the Law Commission, with which spirit, Section 12 has been amended by the Amendment Act, 2015, it is manifest that the main purpose for amending the provision was to provide for neutrality of arbitrators. In order to achieve this, sub-section (5) of Section 12 lays down that notwithstanding any prior agreement to the contrary, any person whose relationship with the parties or counsel or the subject matter of the dispute falls under any of the categories specified in the Seventh Schedule, he shall be ineligible to be appointed as an arbitrator. In such an eventuality i.e. when the arbitration clause finds foul with the amended provisions extracted above, the appointment of an arbitrator would be beyond pale of the arbitration agreement, empowering the court to appoint such arbitrator(s) as may be permissible. That would be the effect of non obstante clause OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 16 of 40 Vs. Sony India Private Limited contained in sub-section (5) of Section 12 and the other party cannot insist on appointment of the arbitrator in terms of arbitration agreement."
15. In the case of Bharat Broadband Network Limited (Supra), it is observed that Sub-section (5) of Section 12 read with Seventh Schedule made it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes 'ineligible' to act as an arbitrator. It is further observed that once he becomes 'ineligible', it is clear that he then become dejure unable to perform his functions inasmuch as in law, he is regarded as 'ineligible'. It further is observed in the said decision that where a person becomes ineligible to be appointed as an arbitrator there is no question of challenge to such arbitrator before such arbitrator in such a case i.e. a case which falls under Section 14(1)(a) of the Act gets attracted inasmuch as the arbitrator becomes, as a matter of law (i.e., de jure), unable to perform his functions under Section 12(5), being ineligible to be appointed as an arbitrator and this being so, his mandate automatically terminates, and he shall then be substituted by another arbitrator." 8.1 In the aforesaid decision, this Court also negatived the submission that as the contractor participated in the arbitration proceedings before the arbitrator therefore subsequently, he ought not to have approached the High Court for appointment of a fresh arbitrator under Section 11 of the Arbitration Act, 1996. After referring to the decision of this Court in the case of Bharat Broadband Network Limited v. United Telecoms Limited, reported in (2019) 5 SCC 755, it is observed and held in paragraph 20 as under:
"20. Now so far as the submission on behalf of the petitioners that the respondents participated in the arbitration proceedings before the sole arbitrator - Chairman and therefore he ought not to have approached the High Court for appointment of arbitrator under Section 11 is concerned, the same has also no substance. As held by this Court in the case of Bharat Broadband Network Limited (Supra) there must be an 'express agreement' in writing to satisfy the requirements of Section 12(5) proviso. In OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 17 of 40 Vs. Sony India Private Limited paragraphs 15 & 20 it is observed and held as under:
"15. Section 12(5), on the other hand, is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non-obstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The sub-section then declares that such person shall be "ineligible" to be appointed as arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, in law, is that parties may after disputes have arisen between them, waive the applicability of this sub-section by an "express agreement in writing". Obviously, the "express agreement in writing" has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the Seventh Schedule.
xxx xxx xxx
20. This then brings us to the applicability of the proviso to Section 12(5) on the facts of this case. Unlike Section 4 of the Act which deals with deemed waiver of the right to object by conduct, the proviso to Section 12(5) will only apply if OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 18 of 40 Vs. Sony India Private Limited subsequent to disputes having arisen between the parties, the parties waive the applicability of sub- section (5) of Section 12 by an express agreement in writing. For this reason, the argument based on the analogy of Section 7 of the Act must also be rejected. Section 7 deals with arbitration agreements that must be in writing, and then explains that such agreements may be contained in documents which provide a record of such agreements.
On the other hand, Section 12(5) refers to an "express agreement in writing". The expression "express agreement in writing" refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct. Here, Section 9 of the Indian Contract Act, 1872 becomes important. It states: "9. Promises, express and implied.--In so far as a proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied." It is thus necessary that there be an "express" agreement in writing. This agreement must be an agreement by which both parties, with full knowledge of the fact that Shri Khan is ineligible to be appointed as an arbitrator, still go ahead and say that they have full faith and confidence in him to continue as such. The facts of the present case disclose no such express agreement. The appointment letter which is relied upon by the High Court as indicating an express agreement on the facts of the case is dated 17.01.2017. On this date, the Managing Director of the appellant was certainly not aware that Shri Khan could not be appointed by him as Section 12(5) read with the Seventh Schedule only went to the invalidity of the appointment of the Managing Director himself as an arbitrator. Shri Khan's invalid appointment only became clear after the declaration of the law by the Supreme Court in TRF Ltd. (supra) which, as we have seen hereinabove, was only on 03.07.2017. After this date, far from there being an express agreement between the parties as to the validity of Shri Khan's appointment, the appellant filed an application on 07.10.2017 before the sole arbitrator, bringing the arbitrator's attention to the judgment in TRF Ltd. (supra) and asking him to declare that he has become de jure incapable OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 19 of 40 Vs. Sony India Private Limited of acting as an arbitrator. Equally, the fact that a statement of claim may have been filed before the arbitrator, would not mean that there is an express agreement in words which would make it clear that both parties wish Shri Khan to continue as arbitrator despite being ineligible to act as such. This being the case, the impugned judgment is not correct when it applies Section 4, Section 7, Section 12(4), Section 13(2), and Section 16(2) of the Act to the facts of the present case, and goes on to state that the appellant cannot be allowed to raise the issue of eligibility of an arbitrator, having itself appointed the arbitrator. The judgment under appeal is also in correct in stating that there is an express waiver in writing from the fact that an appointment letter has been issued by the appellant, and a statement of claim has been filed by the respondent before the arbitrator. The moment the appellant came to know that Shri Khan's appointment itself would be invalid, it filed an application before the sole arbitrator for termination of his mandate."
9. In view of the above and for the reasons stated hereinabove, the impugned judgment and order passed by the High Court is contrary to the law laid down by this Court in the cases of TRF (supra), Bharat Broadband Network Limited (supra) and the recent decision of this Court in the case of Jaipur Zila Dugdh Utpadak Sahkari Sangh Limited (supra). It is held that the earlier Arbitral Tribunal - Stationery Purchase Committee comprising of Additional Secretary, Department of Revenue as President and (i) Deputy Secretary, Department of Revenue, (ii) Deputy Secretary, General Administration Department, (iii) Deputy Secretary, Department of Finance, (iv) Deputy Secretary/Under Secretary, General Administration Department and (v) Senior Deputy Controller of Head Office, Printing as Members, has lost its mandate by operation of law in view of Section 12(5) read with Seventh Schedule and a fresh arbitrator has to be appointed under the provisions of the Arbitration Act, 1996. The impugned judgment and order passed by the High Court is therefore unsustainable and deserves to be quashed and set aside.
OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 20 of 40 Vs. Sony India Private Limited
13. Hon'ble Delhi High Court in case titled Ram Kumar and Another Vs. Shri Ram Transport Finance Co. Ltd. FAO(Comm.) 60/2021 dated 05.12.2022 also held that unilateral appointment of Arbitrator by the Claimant is impermissible however, it is permissible for the parties to waive the ineligibility of the Arbitrator, the proviso to the Section 12 (5) of the A & C Act makes it clear that such agreement requires to be in writing. However, in present case, there is no such express agreement. Therefore, on this ground alone, the impugned award is liable to be set- aside.
14. Hon'ble Delhi High Court in recent case titled 'Shapoorji Pallonji And Company Private Limited Vs. Union of India, ARB.P. 154/2023, dt. 20.02.2023' also held that constitution of Arbitral Tribunal like of present case clearly tainted by fundamental illegality and observed as under:
"..12. It would be apposite to recall that in Perkins the Supreme Court had an occasion to examine the validity of two distinct categories of arbitration clauses namely, those where an authority was not only named as the arbitrator and additionally conferred the power to nominate as well as those where a person who was otherwise ineligible to be considered for appointment as an arbitrator being granted the right to nominate. The Supreme Court ultimately came to conclude that in neither of those situations would the appointment procedure so contemplated sustain. This is evident from the following passages of the report which are extracted hereinbelow: -
"19. It was thus held that as the Managing Director became ineligible by operation of law to act as an arbitrator, he could not nominate another person to act as an arbitrator and that once the identity of the Managing Director as the sole OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 21 of 40 Vs. Sony India Private Limited arbitrator was lost, the power to nominate someone else as an arbitrator was also obliterated. The relevant clause in said case had nominated the Managing Director himself to be the sole arbitrator and also empowered said Managing Director to nominate another person to act as an arbitrator. The Managing Director thus had two capacities under said clause, the first as an arbitrator and the second as an appointing authority. In the present case we are concerned with only one capacity of the Chairman and Managing Director and that is as an appointing authority.
20. We thus have two categories of cases. The first, similar to the one dealt with in TRF Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72] where the Managing Director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the Managing Director is not to act as an arbitrator himself but is empowered or authorised to appoint any other person of his choice or discretion as an arbitrator.
If, in the first category of cases, the Managing Director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be the test, similar invalidity would always arise and spring even in the second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases. We are conscious that if such deduction is drawn from the decision of this Court in TRF Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 :
(2017) 4 SCC (Civ) 72] , all cases having clauses similar to that with which we are presently OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 22 of 40 Vs. Sony India Private Limited concerned, a party to the agreement would be disentitled to make any appointment of an arbitrator on its own and it would always be available to argue that a party or an official or an authority having interest in the dispute would be disentitled to make appointment of an arbitrator.
21. But, in our view that has to be the logical deduction from TRF Ltd. [TRF Ltd. v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 : (2017) 4 SCC (Civ) 72] Para 50 of the decision shows that this Court was concerned with the issue, "whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an arbitrator" The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute 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. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter-balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. 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. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016) and recognised by the decision of this Court in TRF Ltd. [TRF Ltd.
OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 23 of 40 Vs. Sony India Private Limited v. Energo Engg. Projects Ltd., (2017) 8 SCC 377 :
(2017) 4 SCC (Civ) 72]"
13. While on the question of impartiality and independence of an arbitrator and its inherent importance to the integrity of the arbitral process itself, the Court also deems it apposite to refer to the following passages from the 246 th Report of the Law Commission: -
"53. It is universally accepted that any quasi- judicial process, including the arbitration process, must be in accordance with principles of natural justice. In the context of arbitration, neutrality of arbitrators, viz. their independence and impartiality, is critical to the entire process.
54. In the Act, the test for neutrality is set out in section 12(3) which provides -
"An arbitrator may be challenged only if (a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality..."
55. The Act does not lay down any other conditions to identify the "circumstances" which give rise to "justifiable doubts", and it is clear that there can be many such circumstances and situations. The test is not whether, given the circumstances, there is any actual bias for that is setting the bar too high; but, whether the circumstances in question give rise to any justifiable apprehensions of bias.
56. The limits of this provision has been tested in the Indian Supreme Court in the context of contracts with State entities naming particular persons/designations (associated with that entity) as a potential arbitrator. It appears to be settled by a series of decisions of the Supreme Court (See Executive Engineer, Irrigation Division, Puri v. Gangaram Chhapolia, 1984 (3) SCC 627; Secretary to Government Transport Department, Madras v. Munusamy Mudaliar, 1988 (Supp) SCC 651;
International Authority of India v. K.D. Bali and Anr, 1988 (2) SCC 360; S.Rajan v. State of Kerala, 1992 (3) SCC 608; M/s. Indian Drugs & Pharmaceuticals v. M/s. Indo-Swiss Synthetics OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 24 of 40 Vs. Sony India Private Limited Germ Manufacturing Co.Ltd., 1996 (1) SCC 54; Union of India v. M.P. Gupta, (2004) 10 SCC 504; Ace Pipeline Contract Pvt. Ltd. v. Bharat Petroleum Corporation Ltd., 2007 (5) SCC 304) that arbitration agreements in government contracts which provide for arbitration by a serving employee of the department, are valid and enforceable. While the Supreme Court, in Indian Oil Corp. Ltd. v. Raja Transport (P) Ltd., 2009 8 SCC 520 carved out a minor exception in situations when the arbitrator "was the controlling or dealing authority in regard to the subject contract or if he is a direct subordinate (as contrasted from an officer of an inferior rank in some other department) to the officer whose decision is the subject matter of the dispute", and this exception was used by the Supreme Court in Denel Propreitory Ltd. v. Govt. of India, Ministry of Defence, AIR 2012 SC 817 and Bipromasz Bipron Trading SA v. Bharat Electronics Ltd., (2012) 6 SCC 384, to appoint an independent arbitrator under section 11, this is not enough.
57. The balance between procedural fairness and binding nature of these contracts, appears to have been tilted in favour of the latter by the Supreme Court, and the Commission believes the present position of law is far from satisfactory. Since the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the arbitral tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles - even if the same has been agreed prior to the disputes having arisen between the parties. There are certain minimum levels of independence and impartiality that should be required of the arbitral process regardless of the parties‟ apparent agreement. A sensible law cannot, for instance, permit appointment of an arbitrator who is himself a party to the dispute, or who is employed by (or similarly dependent on) one party, OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 25 of 40 Vs. Sony India Private Limited even if this is what the parties agreed. The Commission hastens to add that Mr. PK Malhotra, the ex officio member of the Law Commission suggested having an exception for the State, and allow State parties to appoint employee arbitrators. The Commission is of the opinion that, on this issue, there cannot be any distinction between State and non- State parties. The concept of party autonomy cannot be stretched to a point where it negates the very basis of having impartial and independent adjudicators for resolution of disputes. In fact, when the party appointing an adjudicator is the State, the duty to appoint an impartial and independent adjudicator is that much more onerous - and the right to natural justice cannot be said to have been waived only on the basis of a "prior" agreement between the parties at the time of the contract and before arising of the disputes."
14. Voestalpine, as well, had underlined the importance of neutrality of arbitrators and its significant bearing upon the sanctity of the arbitral proceedings in the following terms:
"20. Independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which applied to all judicial and quasi-judicial proceedings. It is for this reason that notwithstanding the fact that relationship between the parties to the arbitration and the arbitrators themselves are contractual in nature and the source of an arbitrator's appointment is deduced from the agreement entered into between the parties, notwithstanding the same non-independence and non-impartiality of such arbitrator (though contractually agreed upon) would render him ineligible to conduct the arbitration. The genesis behind this rational is that even when an arbitrator is appointed in terms of contract and by the parties to the contract, he is independent of the parties. Functions and duties require him to rise above the OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 26 of 40 Vs. Sony India Private Limited partisan interest of the parties and not to act in, or so as to further, the particular interest of either parties. After all, the arbitrator has adjudicatory role to perform and, therefore, he must be independent of parties as well as impartial. The United Kingdom Supreme Court has beautifully highlighted this aspect in Hashwani v. Jivraj [Hashwani v. Jivraj, (2011) 1 WLR 1872 : 2011 UKSC 40] in the following words: (WLR p. 1889, para 45) "45. ... the dominant purpose of appointing an arbitrator or arbitrators is the impartial resolution of the dispute between the parties in accordance with the terms of the agreement and, although the contract between the parties and the arbitrators would be a contract for the provision of personal services, they were not personal services under the direction of the parties."
21. Similarly, Cour de Cassation, France, in a judgment delivered in 1972 in Consorts Ury [Fouchard, Gaillard, Goldman on International Commercial Arbitration 562 (Emmanuel Gaillard & John Savage eds., 1999) {quoting Cour de cassation [Cass.] [Supreme Court for judicial matters] Consorts Ury v. S.A. des Galeries Lafayette, Cass. 2e civ., 13-4-1972, JCP, Pt. II, No. 17189 (1972) (France)}.] , underlined that:
"an independent mind is indispensable in the exercise of judicial power, whatever the source of that power may be, and it is one of the essential qualities of an arbitrator."
22. Independence and impartiality are two different concepts. An arbitrator may be independent and yet, lack impartiality, or vice versa. Impartiality, as is well accepted, is a more subjective concept as compared to independence. Independence, which is more an objective concept, may, thus, be more straightforwardly ascertained by the parties at the outset of the arbitration proceedings in light of the circumstances disclosed by the arbitrator, while OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 27 of 40 Vs. Sony India Private Limited partiality will more likely surface during the arbitration proceedings."
15. The Court further finds that the aforenoted decision had also entered the following noteworthy observations on the issue of a panel of arbitrators that may be offered to a party for the purposes of nomination:-
"28. Before we part with, we deem it necessary to make certain comments on the procedure contained in the arbitration agreement for constituting the Arbitral Tribunal. Even when there are a number of persons empanelled, discretion is with DMRC to pick five persons therefrom and forward their names to the other side which is to select one of these five persons as its nominee (though in this case, it is now done away with). Not only this, DMRC is also to nominate its arbitrator from the said list. Above all, the two arbitrators have also limited choice of picking upon the third arbitrator from the very same list i.e. from remaining three persons. This procedure has two adverse consequences. In the first place, the choice given to the opposite party is limited as it has to choose one out of the five names that are forwarded by the other side. There is no free choice to nominate a person out of the entire panel prepared by DMRC. Secondly, with the discretion given to DMRC to choose five persons, a room for suspicion is created in the mind of the other side that DMRC may have picked up its own favourites. Such a situation has to be countenanced. We are, therefore, of the opinion that sub-clauses (b) & (c) of Clause 9.2 of SCC need to be deleted and instead choice should be given to the parties to nominate any person from the entire panel of arbitrators. Likewise, the two arbitrators nominated by the parties should be given full freedom to choose the third arbitrator from the whole panel."
16. The Court notes that clause 25 not only fails to enable the petitioner to choose from out of a panel of seven names, the composition of that panel itself is left to the sole discretion of the Chief Project Manager. Thus, the Court comes to conclude that OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 28 of 40 Vs. Sony India Private Limited the constitution of a Tribunal in accordance with the procedure prescribed in clause 25 would clearly be tainted by fundamental illegality. It neither permits a party to independently choose or nominate an arbitrator, it also vests the power of constitution exclusively in the hands of the Chief Project Manager. Since the Chief Project Manager would itself be disqualified in law to arbitrate upon the dispute, the said authority cannot possibly be countenanced in law to have the power to constitute the Tribunal..."
15. Hon'ble High Court of Calcutta in recent case title 'Cholamandalam Investment and Finance Company Ltd. Vs. Amrapali Enterprises and Anr., EC 122 of 2022, dt. 14.03.2023', reinforced the said proposition and held as under :
"....5. The position of law on unilateral appointment of an arbitrator is no more res integra and has been settled by the Supreme Court through various judicial pronouncements.
6. Firstly, in the case of HRD Corporation -vs- GAIL reported in (2018) 12 SCC 471 [Coram: R.F.Nariman and S.K. Kaul, JJ.], the Apex Court ruled that when a person directly falls under Schedule VII, ineligibility goes to the root of the appointment as per prohibition under Section 12(5) read with Schedule VII. Such person lacks inherent jurisdiction. Thereafter, in TRF Limited -vs- Energo Engineering Projects Limited reported in [2017] 7 S.C.R. 409 [Coram: Dipak Misra and A.M. Khanwilkar, JJ.], the Apex Court expanded the approach in HRD Corporation (supra) and held that an individual who himself is ineligible under the provisions of the Act to be appointed as an arbitrator, cannot nominate a sole arbitrator. The ineligibility goes to the root of the matter and arises out of lack of inherent jurisdiction. The relevant paragraph penned down by J. Nariman in HRD Corporation (supra) is enumerated below for reference :-
"57. In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 29 of 40 Vs. Sony India Private Limited respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so."
7. Subsequently, in Perkins Eastman Architects DPC & Anr. - vs- HSCC (India) Ltd. reported in [2019] 17 S.C.R. 275 [U.U. Lalit and Indu Malhotra, JJ.] the Supreme Court extended the approach taken in TRF Limited (supra) and held that a party who has an interest in the outcome of a dispute also cannot nominate a sole arbitrator. The relevant portion of eloquent exposition penned by U.U. Lalit, J. is extracted below :-
"15. ....... We thus have two categories of cases. The first, similar to the one dealt with in TRF Ltd. where the Managing Director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the Managing Director is not to act as an arbitrator himself but is empowered or authorised to appoint any other person of his choice or discretion as an arbitrator. If, in the first category of cases, the Managing Director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 30 of 40 Vs. Sony India Private Limited would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be the test, similar invalidity would always arise and spring even in the second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases. We are conscious that if such deduction is drawn from the decision of this Court in TRF Ltd., all cases having clauses similar to that with which we are presently concerned, a party to the agreement would be disentitled to make any appointment of an arbitrator on its own and it would always be available to argue that a party or an official or an authority having interest in the dispute would be disentitled to make appointment of an arbitrator."
16. But, in our view that has to be the logical deduction from TRF Limited. Paragraph 50 of the decision shows that this Court was concerned with the issue, "whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an Arbitrator" The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute 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. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 31 of 40 Vs. Sony India Private Limited the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. 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. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognised by the decision of this Court in TRF Limited."
Emphasis Added Therefore, the proscription under Section 12(5) read with Schedule VII of the Act was extended to persons unilaterally appointed to act as an arbitrator. Such persons who are unilaterally appointed lack inherent jurisdiction unless an express written approval is given by the parties subsequent to disputes having arisen.
8. Finally, the Supreme Court in Bharat Broadband Network Limited -vs- United Telecoms Limited reported in [2019] 6 S.C.R. 97 [Coram: R. F. Nariman and Vineet Saran, JJ.] held that a unilaterally appointed arbitrator is de jure ineligible to perform his functions and that his mandate is automatically terminated under Section 14(1)(a) of the Act. Further, any prior agreement to do away with this ineligibility would be wiped out by the non-obstante clause contained in Section 12(5), and the same can be cured only through an express waiver. I have delineated the relevant paragraphs herein below :-
"15. Section 12(5), on the other hand, is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the nonobstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The sub- section then declares that such person shall be "ineligible" to be appointed as arbitrator. The OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 32 of 40 Vs. Sony India Private Limited only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, in law, is that parties may after disputes have arisen between them, waive the applicability of this sub-section by an "express agreement in writing". Obviously, the "express agreement in writing" has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the Seventh Schedule."
* * *
17. The scheme of Sections 12, 13 and 14, therefore, is that where an arbitrator makes a disclosure in writing which is likely to give justifiable doubts as to his independence or impartiality, the appointment of such arbitrator may be challenged under Sections 12(1) to 12(4) read with Section 13. However, where such person becomes "ineligible" to be appointed as an arbitrator, there is no question of challenge to such arbitrator, before such arbitrator. In such a case i.e., a case which falls under Section 12(5), Section 14(1)(a) of the Act gets attracted inasmuch as the arbitrator becomes, as a matter of law (i.e., de jure), unable to perform his functions under Section 12(5), being ineligible to be appointed as an arbitrator. This being so, his mandate automatically terminates, and he shall OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 33 of 40 Vs. Sony India Private Limited then be substituted by another arbitrator under Section 14(1) itself. It is only if a controversy occurs concerning whether he has become de jure unable to perform his functions as such, that a party has to apply to the Court to decide on the termination of the mandate, unless otherwise agreed by the parties. Thus, in all Section 12(5) cases, there is no challenge procedure to be availed of. If an arbitrator continues as such, being de jure unable to perform his functions, as he falls within any of the categories mentioned in Section 12(5), read with the Seventh Schedule, a party may apply to the Court, which will then decide on whether his mandate has terminated......."
9. In Yashovardhan Sinha and Ors. -vs- Satyatej Vyapaar Pvt. Ltd. reported in 2022(3) CHN (CAL) 305, while analyzing the judicial pronouncements in TRF Limited (supra) and Perkins (supra), I had outlined the following ratio -
"8.......Therefore, the dicta laid down in these judgments makes it crystal clear that there cannot be unilateral appointment of a sole arbitrator by the respondent as per Clause 19 of the loan agreement as the same is illegal and defeats the very purpose of unbiased and impartial adjudication of the dispute between the parties. The guiding principle is transparency, fairness, neutrality and independence in the selection process and hence, appointment of a sole arbitrator can either be with mutual consent of parties or by an order of the competent court. There can be no third way."
10. Similarly in B.K. Consortium Engineers Private Limited - vs- Indian Institute of Management, Calcutta reported in (2023 SCC OnLine Cal 124), I had the occasion to examine the importance of independence and neutrality of the arbitral tribunal wherein I had expressed the following observations -
"8. In the light of the apex court's pronouncements in Perkins Eastman Architects DPC & Another v. HSCC (India) Ltd. reported in OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 34 of 40 Vs. Sony India Private Limited [2019] 17 S.C.R. 275 and TRF Ltd. v. Energo Engineering Projects Ltd. reported in [2017] 7 S.C.R. 409, it is crystal clear that unilateral appointment of an arbitrator by a party who has some sort of interest in the final outcome or decision is not permissible. The cardinal importance of the independence and neutrality of the arbitral tribunal has been reiterated by the Supreme Court on multiple occasions. For arbitration to be seen as a viable dispute resolution mechanism and as an alternate recourse to litigation, the independence of arbitration process outside the purview of undue influence and favor needs to be ensured in both letter and spirit. and in case of non-adherence to such principles, the courts must step in. If one takes a careful look, the very basic essence of the principle laid down in the above-mentioned case laws is the natural justice principle of nemo judex in causa sua that is 'no one should be made a judge in his own case'. For arbitration decisions to be respected and accepted as decrees of the court, a similar level of integrity in the appointment of arbitrators must be ensured."
11. In light of the aforementioned judicial precedents, it can be said with unambiguous certainty that the unilateral appointment of Mr. Soma Kar Ghosh by the award holder is illegal and void. However, what still remains to be determined is the impact of the aforesaid illegality on the arbitral award and the present execution petition.
12. In Ram Kumar and Ors. -vs- Shriram Transport Finance Co. Limited reported in MANU/DE/4941/2022 [Coram: Vibhu Bakhruand Amit Mahajan, JJ.] a division bench of the Delhi High Court, while adjudicating a Section 34 challenge to an arbitral award passed by a unilaterally appointed arbitrator, held that an arbitral award passed by a person ineligible to act as an arbitrator cannot be considered as an arbitral award under the provisions of the Act. The relevant portion has been reproduced below -
OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 35 of 40 Vs. Sony India Private Limited "8. Clearly, an award rendered by a person who is ineligible to act as an arbitrator would be of little value; it cannot be considered as an arbitral award under the A&C Act. While it is permissible for the parties to agree to waive the ineligibility of an arbitrator, the proviso to Section 12(5) of the A&C Act makes it clear that such an agreement requires to be in writing. In Proddatur Cable TV Digi Services v. Siti Cable Network Limited (2020) 267 DLT 51, the learned Single Judge of this Court, following the decision in TRF Ltd. v. Energo Engineering Projects Ltd. (supra) and Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (supra), held that unilateral appointment of an arbitrator by a party is impermissible."
13. In a similar fashion, in JV Engineering Associate, Civil Engineering Contractors -vs- General Manager, CORE reported in 2020 SCC OnLine Mad 4829, the Madras High Court dealt with the validity of an arbitral award passed by an ineligible arbitrator. P.T. Asha, J., concluded as follows :-
"31. In the above circumstances the Award in question having been passed by an Arbitrator who is ineligible to be an Arbitrator deserves to be set aside more particularly since there is no express waiver in writing as contemplated under the proviso to Section 12(5)."
14. Likewise, the Bombay High Court in Naresh Kanyalal Rajwani - vs- Kotak Mahindra Bank reported in 2022 SCC OnLine Bom 6204, was dealing with effect of unilateral appointments on an arbitral award. Manish Pitale, J., remarked the following :-
"23. Therefore, it becomes evident that in the present case, from the very inception, i.e. from the stage of appointment of the Arbitrator, the proceedings were vitiated and the arbitral award was therefore, rendered unsustainable. This Court is inclined to allow the petition only on the aforesaid ground."
OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 36 of 40 Vs. Sony India Private Limited
15. I find myself in complete concurrence with the aforesaid judgments, and in my view, the impugned award is unsustainable and non-est in the eyes of law. It is a settled principle of law that compliance with Section 12(5) read with Schedule VII is sine qua non for any arbitral reference to gain recognition and validity before the Courts. In the present facts in hand, an arbitral reference which itself began with an illegal act has vitiated the entire arbitral proceedings from its inception and the same cannot be validated at any later stage. Thus, it would be a logical inference to consider the aforesaid arbitral proceedings as void ab initio.
16. In my view, the impugned award, which was passed by a dejure ineligible arbitrator, suffers from a permanent and indelible mark of bias and prejudice which cannot be washed away at any stage including the execution proceedings. Infact, as the arbitrator was dejure ineligible to perform his functions and therefore lacked inherent jurisdiction or competence to adjudicate the disputes in hand, the impugned award cannot be accorded the privileged status of an award.
17. In light of the above findings, it is palpably clear that an arbitral award passed by a unilaterally appointed arbitrator will not survive the Section 34 challenge. However, the arbitration application before me is not under Section 34 but rather an execution petition under Section 36. There is no denying the fact that the Act is a complete code in itself and at the same time, it is equally true that Section 36 provides no scope of adverse interference with an arbitral award except executing it as a decree of the court. While Section 47 of the Code of Civil Procedure, 1908 (hereinafter referred to as the 'CPC') governs the challenge to a court decree at the execution stage, there is no such similar provision provided in the Act. However, at this juncture it would be relevant to examine the jurisprudence with respect to decrees passed by bodies lacking inherent jurisdiction.
18. The Apex Court in Sunder Dass -vs- Ram Prakash reported in 1977 AIR 1201 had stated that decrees passed by bodies lacking inherent jurisdiction are unenforceable and it would be as if no decree existed at all. P.N. Bhagwati, J., in his inimitable style had examined and penned down the following:
OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 37 of 40 Vs. Sony India Private Limited "3. Now, the law is well settled that an executing court cannot go behind the decree nor can it question its legality or correctness. But there is one exception to this general rule and that is that where the decree sought to be executed is a nullity for lack of inherent jurisdiction in the court passing it, its invalidity can be set up in an execution proceeding. Where there is lack of inherent jurisdiction, it goes to the root of the competence of the court to try the case and a decree which is a nullity is void and can be declared to be void by any court in which it is presented. Its nullity can be set up whenever and wherever it is sought to be enforced or relied upon and even at the stage of execution or even in collateral proceedings. The executing court can, therefore, entertain an objection that the decree is a nullity and can refuse to execute the decree. By doing so, the executing court would not incur the reproach that it is going behind the decree, because the decree being null and void, there would really be no decree at all. Vide Kiran Singh v. Chaman Paswan [AIR 1954 SC 340 : (1955) 1 SCR 117] and Seth Hiralal Patni v. Sri Kali Nath [AIR 1962 SC 199 : (1962) 2 SCR 747]. It is, therefore, obvious that in the present case, it was competent to the executing court to examine whether the decree for eviction was a nullity on the ground that the civil court had no inherent jurisdiction to entertain the suit in which the decree for eviction was passed. If the decree for eviction was a nullity, the executing court could declare it to be such and decline to execute it against the respondent."
Similar pronouncements were made in Hiralal Moolchand Doshi -vs- Barot Raman Lal Ranchhoddas reported in (1993) 2 SCC 458 [Coram: Yogeshwar Dayal, J.] and Sushil Kumar Mehta -vs- Gobind Ram Bohra, reported in (1990) 1 SCC 193 [Coram: K Ramaswamy, J].
OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 38 of 40 Vs. Sony India Private Limited
19. While Section 47 of the CPC is not directly applicable, the jurisprudence referred to above cannot be ignored. Similar principles have to be applied in cases of awards passed by arbitral tribunals lacking inherent jurisdiction. This court cannot shut its eyes to the grave irregularity that will occur if it does not interfere. As outlined in various afore-stated judicial pronouncements, an arbitral award passed by a unilaterally appointed arbitrator cannot be considered as an award under the provisions of the Act and consequently, they have to be regarded as non est in the eyes of law. We have a peculiar situation. The jurisprudence and statute (Section 12[5] read with Schedule VII) ascertains selected arbitrators to inherently lack jurisdiction. But, such jurisdiction can be sanctified/legalised, if express waiver is made by a written agreement, as statutorily carved out owing to considerations of party autonomy. Possibility of waiver was granted as a concession to party autonomy in arbitration law. But that does not mean that the jurisdiction is not inherently lacking before such express waiver is made. As a flip side to this, such waivers should be very strictly construed in terms of its explicitness.
20. In view of the above, the present execution petition has no legs to stand on for the reasons that the award sought to be enforced is not a legal decree. The decree does not exist. Therefore, not merely is it non-executable, the parties would be free to re-agitate the matter before a new arbitral tribunal. However, the parties have given consent in the present matter..."
16. The contention of the Ld. Counsel for the claimant/respondent that this plea of unilateral appointment cannot be taken as not mentioned in the grounds of the petition U/s 34 of Arbitration and Conciliation Act, is not at all tenable firstly the impugned award is passed by the Arbitrator who is de-jure ineligible, secondly in this case the jurisdiction of the arbitrator is already challenged during the arbitration proceedings. Even otherwise, there is no estoppel against the law. Ld. Counsel also submits OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 39 of 40 Vs. Sony India Private Limited that this plea is also not tenable as the petitioners already participated in the proceedings, relied upon Kanodia Infratech Limited (Supra) and McLeod Russel India Limited and Ors. (Supra), however, both these judgments are not applicable in present case as the petitioners challenged the jurisdiction of the Arbitrator at initial stage and thereafter not participated in the proceedings. Even otherwise, these contentions cannot be appreciated as award is void ab nitio, not a legal decree and deadwood.
17. In view of the above discussions, the impugned award dated 18.07.2019 passed in favour of the claimant/respondent is hereby set- aside. The present petition allowed and disposed of accordingly.
18. File be consigned to Record Room after due compliance.
(Ajay Kumar Jain) District Judge, Comm-03 South-East, Saket Courts, Delhi OMP (COMM) 112/19 Sonu Tyagi Proprietor, Tirupati Enterprises dt 18.05.2023 Page 40 of 40 Vs. Sony India Private Limited