Delhi District Court
Bajaj Housing Finance Ltd. ... vs . on 21 August, 2023
BEFORE THE COURT OF SH. SURINDER S. RATHI, DISTRICT JUDGE
(COMM.)-03 SHAHDARA, KKD, DELHI
Ex.(Comm.) No.188/2022
Bajaj Housing Finance Ltd. ........Decree Holder
Vs.
Babita Rawat ........Judgment Debtor
'INDEX'
S No. Description Page
1. Order on Maintainability of Execution Petition 2
2. Submissions made on behalf of Decree Holder 3
3. Assessment of Executability of Ex-Parte Award Passed by Unilaterally Appointed Sole Arbitrator 4
3.1 Scope of Judicial Intervention by Execution Court under Section 47 CPC 5
3.2 Objective behind inclusion of Section 12 (5) and Schedule 5 & 7 in the Arbitration and Conciliation 10
Act, 1996 by way of Arbitration and Conciliation (Amendment) Act, 2015 w.e.f. 23.10.2015
3.3 Law Commission of India's 176th and 246th Report on Arbitration and Conciliation Amended Bill 12
and "Neutrality of Arbitrators"
3.4 Law laid by Hon'ble Supreme Court in Authoritative Judgments: 18
• TRF Limited Vs. Energo Engineering Projects Limited
• Perkins Eastman Architects DPC Vs. HSCC India Limited
• Voestalpine Schienen GMVH Vs. DMRC Ltd.
• Bharat Broadband Network Vs. United Telecoms Limited
• HARSAC and Anr. Vs. Pan India Consultants
• Jaipur JDUSS Ltd. Vs. Ajay Sales and Suppliers
• Ellora Papermills Vs. State of M.P. Dharma Prasthanam Vs. Madhok Construction Pvt. Ltd.
3.5 UNCITRAL Model Law on Commercial Arbitration 1985 and UNCITRAL Arbitration Rules, 2021 29
proscribe and forbid Unilateral appointment of Sole Arbitrator by a disputing party
3.6 Legal position on unilateral appointment of Sole Arbitrator in other countries 31
3.7 Why NBFCs wish to impose their chosen Sole Arbitrator on the borrower and why there is 32
resistance abiding Hon'ble Supreme Court ruled on TRF Limited, Perkins Eastman Judgments?
3.8 Adverse effect of one sided arbitrators on "Enforcement of Contract" component of "Ease of Doing 33
Business" Ranking of India in World Bank's Doing Business Reports of Invesment Friendly Nations
3.9 Ad-hoc Arbitrations by Unilaterally Appointed Sole Arbitrators weakening people's faith in Arbitration as 34
an ADR
3.10 Justice B. N. Srikrishna Report on Arbitration stressed on strengthening 'Institutional Arbitration 35
Centres' in India
3.11 Unilateral appointment of Arbitrator is Anti-thesis to "Nemo Judex in causa cua"- No one can be a 37
Judge in his own case
3.12 Whether CORE Judgment has over-ruled TRF Limited Judgment of Hon'ble Supreme Court? 37
3.13 Conclusion 41
3.14 Petition seeking execution of Ex-Parte Award passed by a Unilaterally Appointed Arbitrator is like 42
reaping benefits of one's own wrong-doing and is abuse of Court process
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
page 1 of 45
Ex.(Comm.) No.188/2022
Bajaj Housing Finance Ltd. ........Decree Holder
Vs.
Babita Rawat ........Judgment Debtor
21.08.2023
Order on Maintainability of Execution Petition
This petition seeks execution of an Ex-parte Arbitral Award dated
12.01.2022 passed by Sh. Shirish Gadge, Ld. Sole Arbitrator at Pune in favour of
DH Finance Company and against the JD for a sum of Rs.4,84,984/- along with
interest @ 14.5% per annum.
In so far as the arbitral award sought to be executed through this Court
was an ex-parte award passed by Ld. Sole Arbitrator who was unilaterally
appointed by the DH Finance Company, following order was passed by this Court
qua maintainability of this execution petition on 19.08.2023.
Case received by way of transfer. It be checked and registered.
Present: None for DH.
This petition is seeking execution of ex-parte arbitral award dated 12.01.2022
passed by a unilaterally appointed arbitrator namely Mr. Shirish Gadge seat located at Pune,
Maharashtra.
Per se this unilateral appointment appears to be in direct violation of Three-
Judge judgment of Hon'ble Supreme Court titled TRF Limited Vs. Energo Engineering
Projects Limited 2017 Latest Caselaw 918 SC and case title Perkins Eastman Architects
DPC Vs. HSCC India Limited 2019 Latest Caselaw 1154 SC.
This was reiterated by Hon'ble Supreme Court in Central Organisation of
Railway Electrification Vs. ECI-SPIC-SMO-FCML(JV) 2019 Latest Caselaw 1281 SC. In
several judgments of the Hon'ble High Court of Delhi, it has been reiterated that a Tribunal
appointed by one party is hit by Section 12 (5) and Schedule 7 of Arbitration & Conciliation
Act, 1996 and that Awards passed by such unilaterally appointed Arbitrators are not tenable in
law. Relevant caselaws from Delhi are:-
1. Delhi Integrated Multi Model Transit Systems vs. Delhi Jal Board, 2021 Latest
Caselaw 3048 Delhi;
2. Proddatur Cable TV Digi Services vs. SITI Cable Network Ltd., 2020 Latest
Caselaw 328 Delhi;
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
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3. M/s. Omcon Infra Pvt. Ltd. v. Indiabull Investment Advisors Ltd.,2020 Latest
Caselaw 2545 Delhi;
4. VSK Technologies Pvt. Ltd. v. Delhi Jal Board, 2021 Latest Caselaw 274
Delhi;
5. Chhaya Rai vs. KLJ Developers Pvt. Ltd., 2021 Latest Caselaw 1440 Delhi.
Arguments have been heard at length on behalf of Ld. Counsel for
Execution Petitioner, the Execution File is perused and the judgments cited on
behalf of DH company are also perused.
Submissions made on behalf of Decree Holder:
While opening his submissions Ld. Counsel for Execution
Petitioner has primarily addressed the Court that there is legal no flaw in
the appointment of Sole Arbitrator, Arbitration Proceedings carried out and
passing of Ex-Parte Award under Execution.
The points highlighted for DH during the submissions made on behalf
of DH are discussed as under:
(1) That the Execution Court cannot go behind the Decree/Award as per Section 47
CPC.
(2) That Section 11(2) of the Arbitration and Conciliation Act, 1996 gives
autonomy to the parties to agree to the procedure for appointment of Arbitrators.
(3) That the Arbitration Clause agreed between the parties permit the Finance
Company to unilaterally appoint the Sole Arbitrator.
(4) That notice of unilateral appointment of arbitrator was sent to the JD but no
objection/challenge was filed qua the same.
(5) That no petition under Section 12 as Section 16 was filed during the pendency
of the arbitral proceedings.
(6) That no objection qua unilateral appointment of Arbitrator was raised under
Section 34 of Arbitration and Conciliation Act, 1996 by the DH.
(7) That the judgments of TRF Limited, Perkins Eastman and Voestalpine stands
over-ruled/diluted by judgments of CORE Judgment of Supreme Court.
(8) That Konodia Infratech Judgment of Delhi High Court ruled that once the
Award is passed the aspect of unilateral appointment of Arbitrator cannot be
raised.
Ex. (Comm.)No. 188/22
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Assessment of Executability of the Ex-Parte Award passed by
Unilaterally Appointed Sole Arbitrator
The aspect of maintainability and executability of this Petition seeking Execution
of Ex-Parte Award passed by a unilaterally appointed Arbitrator as raised can be
discussed and decided under following heads:
I. Scope of Judicial Intervention by Execution Court under
Section 47 CPC.
II. Objective behind inclusion of Section 12 (5) and Schedule 7in
the Arbitration and Conciliation Act, 1996 by way of
Arbitration and Conciliation (Amendment) Act, 2015 w.e.f.
23.10.2015.
III.Law Commission of India's 176th and 246th Report on
Arbitration and Conciliation Amended Bill and "Neutrality of
Arbitrators".
IV. Law laid by Hon'ble Supreme Court in authoritative
Judgments
debarring "Unilateral Appointment of Sole Arbitrators".
(i) TRF Limited Vs. Energo Engineering Projects Ltd.1
(ii) Voestalpine Schienen GMVH Vs. DMRC Ltd. 2
(iii)Perkins Eastman Architects DPC Vs. HSCC IndiaLtd.3
(iv) Bharat Broadband Network Vs. United Telecoms Ltd.4
(v) HARSAC and Anr. Vs. Pan India Consultants5
(vi) Jaipur JDUSS Ltd. Vs. Ajay Sales and Suppliers6,
(vii) Ellora Papermills Vs. State of M.P.7
(viii)Dharma Prasthanam Vs. M/s Madhok Construction Pvt. Ltd. 8
(ix) Kotak Mahindra Bank Ltd. Vs. Narender Kumar Prajapat and
Ors., Latest Caselaw 709 Del dated 23.11.2022
V. UNCITRAL Model Law on Commercial Arbitration 1985 and
UNCITRAL Arbitration Rules, 2021 proscribe and forbid
Unilateral appointment of Sole Arbitrator by a disputing
party.
VI. Legal position on unilateral appointment of Sole Arbitrator in
other countries.
VII. Why NBFCs wish to impose their chosen Sole Arbitrator on
1 2017(8) SCC 377, 2017 Latest Caselaw 918 SC
2 (2017) 4 SCC 665, 2017 Latest Caselaw 919 SC
3 (2020) 20 SCC 760, 2019 Latest Caselaw 1154 SC
4 (2019) 5 SCC 755, 2019 Latest Caselaw 395 SC
5 (2021) 3 SCC 103, 2021 Latest Caselaw 33 SC
6 2021 SCC Online SC 730, 2021 Latest Caselaw 710 SC
7 (2022) 3 SCC 1 , 2022 Latest Caselaw 8 SC
8 (2005) 9 SCC 686
Ex. (Comm.)No. 188/22
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the borrower and why there is resistance abiding Hon'ble
Supreme Court ruled on TRF Limited, Perkins Eastman
Judgments?
VIII. Adverse effect of one sided arbitrators on "Enforcement of
Contract" component of "Ease of Doing Business" Ranking of
India in World Bank's Doing Business Reports of Invesment
Friendly Nations.
IX. Ad-hoc Arbitrations by Unilaterally Appointed Sole
Arbitrators weakening people's faith in Arbitration as an
ADR.
X. Justice B. N. Srikrishna Report on Arbitration stressed on
strengthening 'Institutional Arbitration Centres' in India.
XI. Unilateral appointment of Arbitrator is Anti-thesis to "Nemo
Judex in causa cua"- No one can be a Judge in his own case.
XII. Whether CORE Judgment has over-ruled TRF Limited
Judgment of Hon'ble Supreme Court?
XIII. Conclusion
XIV. Petition seeking execution of Ex-Parte Award passed by a
Unilaterally Appointed Arbitrator is like reaping benefits of
one's own wrong-doing and is abuse of Court process.
Now I will endeavour to discuss these aspects and submissions made on behalf
of DH at length.
(I) Scope of Judicial Intervention by Execution Court under
Section 47 CPC.
1. This Execution Petition has been filed under Section 36 of Arbitration and
Conciliation Act, 1996 (hereinafter referred to as "The Act" read with Order
21 CPC (hereinafter referred to as 'The Code'). In the succeeding paras this
Court with endeavour to ascertain if an "Execution Court" can refuse to
execute an Arbitral Award if it is found that the same is passed by an
Arbitration Tribunal which lacked inherent Jurisdiction to adjudicate the
dispute and whether its appointment was non est and void ab initio.
Ex. (Comm.)No. 188/22
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2. It would be handy to have a glance of Section 36 of 'The Act'.
Section 36: Enforcement
(1) When the time for making an application to set aside the arbitral
award under Section 34 has expired, then, subject to the provisions of
sub-section (2) such award shall be enforced in accordance with the
provisions of the Code of Civil Procedure, 1908 (5 of 1908), in the
same manner as if it were a decree of the court.
(2) Where an application to set aside the arbitral award has been filed in
the Court under Section 34, the filing of such an application shall not
by itself render that award unforceable, unless the Court grants an
order of stay of the operation of the said arbitral award in accordance
with the provisions of sub-section (3), on a separate application made
for that purpose.
(3) Upon filing of an application under sub-section (2) for stay of the
operation of the arbitral award, the Court may, subject to such
conditions as it may deem fit, grant stay of the operation of such
award for reasons to be recorded in writing:
Provided that the Court shall, while considering the application for
grant of stay in the case of an arbitral award for payment of money,
have due regard to the provisions for grant of stay of a money decree
under the provisions of the Code of Civil Procedure, 190.
Provided further that where the Court is satisfied that a prima fcie
case is made out that-
(a) the arbitration agreement or contract which is the basis of the
award; or
(b) the making of the award was induced or effected by fraud or
corruption, it shall stay the award unconditionally pending
disposal of the challenge under Section 34 to the award.
Explanation-For the removal of doubts, it is hereby clarified that the
above proviso shall apply to all court cases arising out of or in relation
to arbitral proceedings, irrespective of whether the arbitral or court
proceedings were commenced prior to or after the commencement of
the Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016)
(Emphasis Supplied)
3. A plain reading of the Statutory Provision makes it amply clear that the right
of Award Holder to seek Enforcement of Award is subject to provisions of
'The Code'.
4. This brings us to Section 47 of the Code which governs the scope of
judicial intervention by an Execution Court. For ready reference same is
reproduced hereunder:
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Section 47 CPC: Questions to be determined by the Court
executing decree
(1) "All questions arising between the parties to the suit in which the decree
was passed, or their representatives, and relating to the execution,
discharge or satisfaction of the decree shall be determined by the
Court executing the decree and not by a separate suit.
(2) ........
(3) Where a question arises as to whether any person is or is not the
representative of a party, such question shall, for the purposes of this
Section be determined by the Court.
Explanation I.-For the purposes of this Section, a plaintiff whose suit
has been dismissed and a defendant against whom a suit has been
dismissed are parties to the suit.
Explanation II.-(a) For the purposes of this Section, a purchaser of
property at a sale in execution of a decree shall be deemed to be a
party to the suit in which the decree is passed; and
(b) All questions relating to the delivery of possession of such property
to such purchaser or his representative shall be deemed to be
questions relating to the execution, discharge or satisfaction of the
decree within the meaning of this Section."
5. Plain reading of the above Statute makes it evident that once a decree is
passed by a Court or an Award is passed by an Arbitral Tribunal all the
questions related to Execution of such Decree/Award must be taken up and
determined by the Executing Court itself and that there shall be no separate
suit for this purpose. In case title Harmand Rai Badridas Vs. Devidutt
Bhagwati Prasad and Ors.9 Hon'ble Supreme Court ruled that,
"In order to empower the Executing Court to consider and determine
all questions relating to the execution of a decree, unless it falls beyond
its ambit, the provision of Section 47 of the Code must be interpreted
liberally."
6. One of the most important duty casted by Section 47 of the Code on
Executing Court is to ascertain:
• Whether the Decree/Arbitral Award passed is executable?
• Did the Court/Arbitral Tribunal which passed the Decree/Award
lacked inherent jurisdiction rendering such Decree/Award to be a
nullity?
Thus the duty of the Executing Court include:-
➢ To not to go beyond decree.
➢ To not to question the correctness of the Decree unless there is
9 AIR (1973) SC 2423
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some ambiguity.
➢ To ascertain if the Court/Arbitral Tribunal which passed the
Decree/Award had the inherent jurisdiction.
7. Thus the question to be dealt by the Executing Court necessarily restricts
itself to the execution part of the decree as long as the same is lawful,
executable and is a not non est or nullity. The Law in this regard is no longer
res integra. There are several authoritative pronouncements in this regard. In
case title Sunder Dass Vs. Ram Prakash 10 of Hon'ble Mr. Justice P. N.
Bhagwati while speaking in for the Bench ruled,
"The validity of a decree can be challenged in execution proceedings only
on the ground that the court which passed the decree lacked inherent
jurisdiction. A court is said to be lacking in jurisdiction when it could not
have seisin of the case because the subject matter was wholly foreign to its
jurisdiction or that the defendant was dead at the time of institution of the
suit or when the suit was decreed. Inherent lack of jurisdiction means a
power or jurisdiction which does not at all exist or vest in a court. A court
lacks inherent jurisdiction when the subject matter is wholly foreign to its
ambit and is totally unconnected with its recognized jurisdiction."
(Emphasis Supplied)
8. In case title Kiran Singh Vs. Chaman Paswan11 Full Bench of Hon'ble
Supreme Court ruled,
"It is a fundamental principle that a decree passed by a court without
jurisdictiion is a nullity and that its invalidity could be set up whenever
and wherever it is sought to be enforced or relied upon, even at the stage
of execution and even in collateral proceedings. A defect of jurisdiction
whether it is pecuniary or territorial, or whether it is in respect of the
subject matter of the action, strikes at the very authority of the Court to
pass any decree and such defect cannot be cured even by consent of
parties."
(Emphasis Supplied)
9. In Case title Urban Improvement Trust, Jodhpur Vs. Gokul Narain12,
Hon'ble Supreme Court held that,
15. A decree passed by a Court without jurisdiction over the subject- matter
or on any other ground which goes to the root of its exercise of jurisdiction
or inherent jurisdiction, is a nullity. A decree passed by such a court is a
nullity and is non est. Its invalidity can be set up whenever it is sought to be
enforced or is acted upon as a foundation for a right even at the stage of
execution or in collateral proceedings. The defect of jurisdiction strikes at
10 AIR 1977 SC 1201
11 1954 Latest Caselaw 43 SC
12 AIR 1996 SC 1819 , 1996 Latest Caselaw 332 SC
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the authority of the Court to pass a decree which cannot be cured by
consent or waiver of the party."
(Emphasis Supplied)
10. In case title Saraswat Trading Agency Vs. Union of India13, it is
held by High Court that,
"If Court finds that decree is a nullity, Court cannot proceed to
execute it. A decree which is a nullity in the eye of law is no decree and,
hence, even by consent of the parties such a decree cannot be executed by
the Court. But for this reason it cannot be denied the remedy available to
it under Section 47. If the Court finds that the decree is a nullity, the
Court cannot proceed to execute it, and it is the duty of the Court to hold
that the decree is not executable."
(Emphasis Supplied)
11. In Daland Uchha Bidyapith Vs. State of Orissa14, it is held that,
"Execution cannot be refused except in case of nullity Execution of the
decree ought not to be refused, unless the decree itself is a nullity."
12. In case title Brakewel Automative Components (India Private)
Ltd. Vs. P.R. Selvam Alagppan15, Hon'ble Supreme Court ruled at para 23
that,
"Through this view has echoed time out of number in similar
pronouncements of this Court in Dhurandhar Prasad Singh Vs. Jain
Prakash University and Others, AIR 2001 SC 2552, while dwelling on
the scope of Section 47 of the Code, it was ruled that the powers of the
court thereunder are quite different and much narrower than those in
appeal/revision or review. The exercise of power under Section 47 of
the Code is microscopic and lied in a very narrow inspection hole and
an executing court can allow objection to the executability of the decree
if it is found that the same is void ab initio and is a nullity, apart from
the ground that it is not capable of execution under the law, either
because the same was passed in ignorance of such provision of law or
the law was promulgated making a decree unexecutable after its passing.
None of the above eventualities as recognised in law for rendering a
decree unexecutable, exists in the case in hand. For obvious reasons, we
do not wish to burden this adjudication by multiplying the decisions
favouring the same view."
(Emphasis Supplied)
13 AIR 2004 Cal 267 (270)
14 AIR 1993 Ori 257:1993 (1) Ori LR 77
15 (2017) 5 SCC 371, 2017 Latest Caselaw 235 SC
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13. In Bijendra Kumar Vs. Pradeep Kumar and Ors.16 Hon'ble Delhi
High Court while discussing another plea between Section 47 CPC and
Section 36 of Arbitration and Conciliation Act, 1996 observed,
"An Award which is a nullity being against public policy can always be
challenged even at the stage of execution in as much as, if we take a
most extreme example that an Award is passed that 'A' will steal money
for 'B' then surely 'B' cannot enforce the Award/decree stating that 'A'
should give him particular amount of money which was to be stolen by
'B' for being given to 'A'."
(Emphasis Supplied)
14. Thus, on the strength of the above judgments and the discussion it can
be fairly concluded that generally speaking the Execution Court cannot go
behind the Decree but as far as the Executability of a Decree/Award is
concerned, if the Executing Court finds that the judgment is non est or that
the Decree/Award is a nullity on account of lack of inherent jurisdiction with
the Arbitral Tribunal, Section 47 of the Code fully empowers the Execution
Court to declare the Decree/Award as "Not Executable" but shall stop short
of declaring it a "Nullity".
(II) Objective behind inclusion of Section 12 (5) and Schedule 7 of
Arbitration and Conciliation Act, 1996 by way of Arbitration and
Conciliation (Amendment) Act, 2015 w.e.f. 23.10.2015.
15. Section 12(5) was introduced in this 1996 Act by way of Arbitration
and Conciliation (Amendment) Act, 2015 notified with effect from
23.10.2015 whereby additional ground for challenging the appointment of
Arbitrator was introduced with simultaneous inclusion of Schedule 7. For
ready reference Section 12(5) of the Act and the 7 th Schedule are reproduced
hereunder:
16 2014 Latest Caselaw 5177 Del
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Arbitration and Conciliation Act, 1996
Sections 12(5): Grounds of Challenge
Notwithstanding any prior agreements 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 Schedule 7 shall be ineligible to
be appointed as an arbitrator.
"Provided that parties may, subsequent to disputes having arisen between
them waive the applicability of this suit by an expressed agreement in
writing."
"The Seventh Schedule"
i. The arbitrator is an employee, consultant, advisor or has any other past
or present business relationship with a party.
ii. The arbitrator currently represents or advises one of the parties or an
affiliate of one of the parties.
iii. The arbitrator currently represents the lawyer or law firm acting as
counsel for one of the parties.
iv. The arbitrator is a lawyer in the same law firm which is representing one
of the parties.
v. The arbitrator is a manager, director or part of the management, or has a
similar controlling influence, in an affiliate of one of the parties if the
affiliate is directly involved in the matters in dispute in the arbitration.
vi. The arbitrator's law firm had a previous but terminated involvement in
the case without the arbitrator being invoked himself or herself.
vii. The arbitrator's law firm currently has a significant commercial
relationship with one of the parties or an affiliate of one of the parties.
viii. The arbitrator regularly advises the appointing party or an affiliate of the
appointing party even though neither the arbitrator nor his or her firm
derives a significant financial income therefrom.
ix. The arbitrator has a close family relationship with one of the parties and
in the case of companies with the persons in the management and
controlling the company.
x. A close family member of the arbitrator has a significant financial
interest in one of the parties or an affiliate in one of the parties.
xi. The arbitrator is a legal representative of an entity that is a party in the
arbitration.
xii. The arbitrator is a manager, director or part of the management, or has a
similar controlling influence in one of the parties.
xiii. The arbitrator has a significant financial interest in one of the parties or
the outcome of the case.
xiv. The arbitrator regularly advises the appointing party or an affiliate of the
appointing party, and the arbitrator or his or her firm derives a
significant financial income therefrom.
Relationship of the Arbitrator to the dispute
xv. The arbitrator has given legal advice or provided an expert opinion on
the dispute to a party or an affiliate of one of the parties.
xvi. The arbitrator has previous involvement in the case.
Arbitrator's direct or indirect interest in the dispute
xvii. The arbitrator holds shares, either directly or indirectly, in one of
the parties or an affiliate of one of the parties that is privately held.
xviii. A close family member of the arbitrator has a significant financial
interest in the outcome of the dispute.
xix. The arbitrator or a close family member of the arbitrator has a close
Ex. (Comm.)No. 188/22
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relationship with a third party who may be liable to recourse on the part
of the unsuccessful party in the dispute.
Explanation 1-The term "close family member" refers to a spouse, sibling,
child, parent or life partner.
Explanation 2- The term "affiliate" encompasses all companies in one group
of companies including the parent company.
Explanation 3- For the removal of doubts, it is clarified that it may be the
practice in certain specific kinds of arbitration, such as maritime or
commodities arbitration, to draw arbitrators from a small, specialized pool. If
in such fields it is the custom and practice for parties frequently to appoint the
same arbitrator in different cases, this is a relevant fact to be taken into
account while applying the rules set out above.
(III) Law Commission of India's 176th and 246th Report on Arbitration
and Conciliation Amended Bill and "Neutrality of Arbitrators".
16. Ministry of Law and Justice, Government of India had constituted Law
Commission of India which paved the way for bringing up the aforesaid
amendments in order to preserve the sanctity of arbitral proceedings by
making them 'Neutral', 'Impartial' and 'Unbiased'. The Law Commission
recommended maintaining of a healthy balance between the critical
component of 'Neutrality and Impartiality' on the one hand and
simultaneously balancing the 'Party Autonomy' in arbitrations. The Law
Commission Reports recommended--
- Incorporating guidelines of International Bar Assocation to
establish the standards of independence and imparitality in the form of
Schedule 5 and Schedule 7 of the Act.
- Introducing Section 12(5) of the Act which would disqualify any
person whose relationship with the parties, counsel or the subject matter
of the dispute falls under the categories set out in the Schedules.
The Law Commission of India emphasised on the neutrality in arbitration in
following words in paras number 53 to 60 of its 246th Report:-
"NEUTRALITY OF ARBITRATORS"
53. It is universally accepted that any quasi-judicial process including
Arbitration process must be in accordance with Principles of Natural
Justice. In this context of Arbitration Neutrality of Arbitrators viz. their
Ex. (Comm.)No. 188/22
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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 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, even if this is what the parties
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
page 13 of 45
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.
58.Large scale amendments have been suggested to address this
fundamental issue of neutrality of arbitrators, which the Commission
believes is critical to the functioning of the arbitration process in India.
In particular, amendments have been proposed to sections 11, 12 and 14
of the Act.
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 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
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
page 14 of 45
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 Supplied)
17. While welcoming the above Statutory development in the sphere of
Arbitration in India, Hon'ble Supreme Court, in Voestalpine Schienen
GMVH Vs. Delhi Metro Rail Corporation Ltd., 17 , a case between an
Austrian company and Delhi Metro Rail Corporation highlighed and
emphasised the salutory need of "Neutrality of Arbitrators while the
DMRC insisted that the Contractor shall choose the Arbitral Tribunal from 5
names sent by DMRC to them from an inhouse panel maintained by the
DMRC. It was pleaded by the Austrian company that this is in direct
violation of Section 12(5) of the Act. Hon'ble Supreme Court discussed the
objective of Arbitration and Conciliation Act, 1996 and the various
amendments brought in it by way of Amendment Act no. 3 of 2016 w.e.f.
23.10.2015. The Apex Court stressed that these amendments were brought in
consonance with Law Commission of India's 176th and 246th Report.
Hon'ble Supreme Court observed,
15. Apart from other amendments, Section 12 was also amended and the
amended provision has already been reproduced above. This
amendment is also based on the recommendation of the Law
Commission which specifically dealt with the issue of 'neutrality of
arbitrators' and a discussion in this behalf is contained in paras 53 to
60 and we would like to reproduce the entire discussion hereinbelow:
17.We may put a note of clarification here. Though, the Law Commission
discussed the aforesaid aspect under the heading "Neutrality of
Arbitrators", the focus of discussion was on impartiality and
independence of the arbitrators which has relation to or bias towards
one of the parties. In the field of international arbitration, neutrality is
generally related to the nationality of the arbitrator. In international
sphere, the 'appearance of neutrality' is considered equally important,
which means that an arbitrator is neutral if his nationality is different
from that of the parties. However, that is not the aspect which is being
considered and the term 'neutrality' used is relatable to impartiality and
independence of the arbitrators, without any bias towards any of the
parties. In fact, the term 'neutrality of arbitrators' is commonly used in
this context as well.
17 (2017) 4 SCC 665
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
page 15 of 45
18.Keeping in mind the afore-quoted 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 arbitration agreement.
18. While highlighting the importance of Neutrality of Arbitrators and the
need that the Tribunal should work in an independent and impartial manner,
Hon'ble Supreme Court thus ruled that even if an Arbitration Clause
allowing unilateral appointments pre-existed before 2015 Amendment, it is
rendered a cipher and a naught with promulgation Section 12(5) read with
Seventh Schedule of the Act specifically when there is a non-obstante
clause. Hon'ble Supreme Court stated that even prior to inclusion of Section
12(5) read with Schedule 7 of the Act several judgments were passed in
context of Section 11(8) of the Act which recommended that the choice of
Arbitrator made by the parties can be given a go-bye in order to maintain the
neutrality, independence and impartiality. The Apex Court further observed
in Voestalpine Judgment:-
19. "We may mention here that there are number of judgments of this Court even
prior to the amendment of Section 12 where courts have appointed the
arbitrators, giving a go-by to the agreed arbitration clause in certain
contingencies and situations, having regards to the provisions of unamended
Section 11(8) of the Act which, inter alia, provided that while appointing the
arbitrator, Chief Justice, or the person or the institution designated by him,
shall have regard to the other conditions as are likely to secure the
appointment of an independent and impartial arbitrator."
Taking note of the below mentioned judgments, Hon'ble Apex Court in
summed up the position. i.e.
Datar Switchgears Ltd. v. Tata Finance Ltd. & Anr.(2000) 8 SCC 151
Punj Lloyd Ltd. v. Petronet MHB Ltd,(2006) 2 SCC 638
Union of India v. Bharat Battery Manufacturing Co. (P) Ltd.,(2007) 7 SCC
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
page 16 of 45
684
Deep Trading Co. v. Indian Oil Corporation (2013) 4 SCC 35.
Union of India v. Singh Builders Syndicate (2009) 4 SCC 523
Northern Eastern Railway v. Tripple Engineering Works (2014) 9 SCC 288
Union of India and others v. Uttar Pradesh State Bridge
Corporation(2015) 2 SCC 52
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 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.
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 dispute is the
Government or public sector undertaking itself and the authority to appoint
the arbitrator rests with it."
(Emphasis Supplied)
19. As stressed and highlighted by Hon'ble Supreme Court, 'Neutrality of
the Arbitral Tribunal' is the soul of adjudication of a dispute and the same
cannot be compromised. By quoting Law Commission of India and other
judgments of Apex Court of period even prior to inclusion of Section 12(5)
read with Schedule 7 of the Act, it is authoritatively ruled that "Neutrality
of the Arbitrators is not compromisable."
(IV) Law laid by Hon'ble Supreme Court in several authoritative
Judgments debarring "Unilateral Appointment of Sole Arbitrators" :
● TRF Limited Vs. Energo Engineering Projects Limited (supra)
● Perkins Eastman Architects DPC Vs. HSCC India Limited (supra)
● Voestalpine Schienen GMVH Vs. DMRC Ltd. (supra)
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
page 17 of 45
● Bharat Broadband Network Vs. United Telecoms Limited (supra)
● HARSAC and Anr. Vs. Pan India Consultants (supra)
● Jaipur JDUSS Ltd. Vs. Ajay Sales and Suppliers (supra)
● Ellora Papermills Vs. State of M.P. (supra)
● Dharma Prasthanam Vs. Madhok Construction Pvt. Ltd. (supra)
20. In case titled TRF Limited Vs. Energo Engineering Projects Ltd.
(2017) 8 SCC 377 Full Bench of Hon'ble Supreme Court led by Justice
Deepak Mishra had the opportunity to reprise and articulate the course
corrective effect introduction of Section 12(5) read with Schedule 7 of the
Act. The issue before Hon'ble Full Bench of the Supreme Court was,
"Whether a person who is ineligible to preside an Arbitral Tribunal on
account of operation of law i.e. Section 12(5) read with Schedule 7 of the
Act would be eligible to nominate another person as Arbitrator." While
comparing the unamended Section 12 of the Act with the amended Section
12 of the Act, post 2015 Amendment, Hon'ble Supreme Court ruled:
"12.Sub-Section (5) of Section 12, on which immense stress has been laid by
the learned counsel for the appellant, as has been reproduced above,
commences with a non-obstante clause. It categorically lays down that if
a person whose relationship with the parties or the counsel for the
subject matter of the dispute falls under any of the categories specified
in the Seventh Schedule shall be ineligible to be appointed as an
arbitrator. There is a qualifier which indicates that parties may
subsequent to the disputes arisen between them, waive the
applicability by express agreement in writing. The qualifier finds place in
the proviso appended to sub-section 5 of Section 12. On a careful
scrutiny of the proviso,it is discernible that there are fundamentally
three components, namely the parties can waive the applicability of the
sub-section; the said waiver can only take place subsequent to dispute
having arisen between the parties; and such waiver must be by an express
agreement in writing."
(Emphasis Supplied)
21. Hon'ble Full Bench distinguished that the Arbitral Agreements where
both sides are required to appoint one Arbitrator each who, in turn, appoint a
Third Neutral Arbitrator with cases where the Arbitrator Clause gives full
power to only one party to appoint a Sole Arbitrator in this matter. While
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
page 18 of 45
appreciating the concern of the appellant that by virtue of Section 12(5) read
with Schedule 7 of the Act an employee/official of a disputing party cannot
act as an Arbitrator, such an employee/official cannot also appoint another
Arbitrator unilaterally Hon'ble Apex Court observed:-
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 respectablity. 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.
(Emphasis Supplied)
22. The aspect of Unilateral Appointment of Arbitrator and its derelictious
effect on neutrality, independence and impartiality of Arbitral proceedings
Hon'ble Supreme Court discussed the issue threadbare in case title Perkins
Eastman Architects DPC Vs. HSCC India Limited, (2020) 20 SCC 760.
Taking cue from 'TRF Judgment' the aspect which was taken up for
consideration by the Apex Court in Perkins Eastman Judgment is where a
Managing Director or any official or authority who is a disputing party may
not be acting as an Arbitrator but empowered under the Arbitration Clause to
appoint another person of choice or discretion as an Arbitrator. The Bench
Observed:
"We thus have two categories of cases. The first, similar to the one dealt
with in TRF Limited4 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
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
page 19 of 45
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 Limited4, 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.
23. While discussing the above referred Voestalpine Judgment and Law
Commission of India, 176th and 246th Report the Apex Court highlighted
that the principles of procedural fairness, impartiality and independence
cannot be discarded at any stage of the proceedings. The Supreme Court
Bench quoted in Perkins Judgment, "
"Since the principles of impartiality and independence cannot be
discarded at any stage of the proceedings, specifically at the stage of
consideration of the Arbitral Tribunal, it would be incongruous to say that
"Parties Autonomy" can be exercised in complete disregard of these
principles and even if the same has been agreed prior to the disputes having
risen between the parties. There are certain minimum levels of
independence and impartiality that should be required of the arbitral
process regardless of 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,
even if this is what the parties agree.......
In fact, when the party appointing an adjudicator in the suit, 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 Contract or before arising out of the disputes".
(Emphasis Supplied)
24. In case title Bharat Broadband Network Vs. United Telecoms
Limited, (2019) 5 SCC 755 while dealing with an issue of Section 12(5)
read with Schedule 7 qua unilateral appointment of arbitrator by official of
the disputing company, the Bench led by Justice R. F. Nariman dealt with an
issue wherein during the pendency of arbitral proceedings before a Sole
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
page 20 of 45
Arbitrator who was unilaterally appointed by CMD of Bharat Broadband
Network, an application was moved before the Arbitrator by the Bharat
Broadband Network company that in the light of TRF Limited the Tribunal
would be de jure unable to perform the function as Arbitrator and that he
should withdraw from the arbitration so that an application under Section 11
of the Act can be filed before the High Court. The plea was rejected by the
Arbitrator. When Bharat Broadband Network approached Delhi High Court,
the High Court rejected the plea of the Bharat Broadband Network on the
ground that since the Sole Arbitrator was appointed by Bharat Broadband
Network itself, it is estopped from making a plea for removal of the
arbitrator. While discussing Voestalpine Schienen Hon'ble Supreme Court
ruled that,
"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 7 th 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 7th 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 having arisen between
them, waive the applicability of this sub-section by an "express agreement in
writing". The express agreement in writing" has reference to a person who is
interdicted by the 7th 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 7 th Schedule.
25. In case title Dharma Prasthanam Vs. M/s Madhok Construction
Pvt. Ltd. (2005) 9 SCC 686 Hon'ble Supreme Court while dealing with the
aspect of 'Unilateral Appointment of Arbitrator' even in the pre-2015
Amendment period ruled,
"A unilateral appointment as well as a unilateral reference, both will be
illegal. It would make a difference if in respect of a unilateral appointment and
reference if the other party had submitted to the jurisdiction of an arbitrator so
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
page 21 of 45
appointed and if the rights which it has under such an agreement has been
waived, then an arbitrator so appointed may proceed with the reference and the
party submitting to his jurisdiction and participating in the proceedings before
him may later on not be allowed to raise any objection in with regard to such
appointment of arbitrator."
26. In case title Haryana Space Application Centre (HARSAC) and
Anr. Vs. Pan India Consultants, (2021) 3 SCC 103 the Full Bench of
Hon'ble Supreme Court dealt with a case where the petitioner appointed the
Principal Secretary of the State as Nominee Arbitrator and arbitral
proceedings were going on in for more than 4 years, Full Bench of Hon'ble
Supreme Court ruled that the application of Section 12(5) read with Schedule
7 of the Act is mandatory and not derogable. The Apex Court ruled,
"We are of the view that the appointment of the Principal Secretary,
Government of Haryana as the nominee arbitrator of HARSAC which is a
Nodal Agency of the Government of Haryana, would be invalid under
Section 12(5) of the Arbitration and Conciliation Act, 1996 (as amended
by the 2015 Amendment Act) provides that notwithstanding any prior
agreement to the contrary, any person whose relationship with the parties,
or cousel falls within any of the categories specified in the 7 th Schedule,
shall be ineligible to be appointed as an arbitrator.........
The arbitrator is a manager, director or part of the management of has a
similar controlling influence, in an affiliate of one of the parties if the
affiliate is directly involved in the matters in dispute in the
arbitration.........
Section 12(5) read with the 7th Schedule is a mandatory and non-
derogable provision of the Act. In the facts of the present case, the
Principal Secretary to the Government of Haryana would be ineligible to
be appointed as an arbitrator, since he would have a controlling influence
on the Appellant Company being a nodal agency of the State.
The Counsel for both parties during the course of hearing have consented
to the substitution of the existing tribunal, by the appointment of a Sole
Arbitrator to complete the arbitral proceedings."
(Emphasis Supplied)
27. Lately, in case title Jaipur Jila Dugdh Utpadak Sehkari Sangh Ltd.
Vs. Ajay Sales and Suppliers, 2021 SCC Online SC 730, the Supreme
Court Bench headed by HMJ M R Shah dealt with a case where the
Arbitration Clause dated 31.03.2015 provided for appointment of Sangh's
Chairman as Sole Arbitrator. When the dispute arose and Arbitration was
Ex. (Comm.)No. 188/22
Bajaj Housing Finance Ltd. Vs. Babita Rawat
page 22 of 45
invoked on 19.10.2019, the respondent approached High Court of Rajasthan
which under Section 11 of The Act where a fresh Arbitrator was appointed. When the High Court's order was challenged before the Supreme Court with a plea that the Arbitration Clause pre-existed the 2015 Amendment of The Act and inclusion of Section 12(5) and Schedule 7 Hon'ble Supreme Court while dismissing the petition challenging the High Court order ruled that, "So far as the submission on behalf of the petitioners that the agreement was prior to the insertion of Sub-Section 5 of Section 12 read with 7th Schedule to the Act and therefore the disqualification under Sub-Section 5 of Section 12 read with 7th Schedule to the Act shall not be applicable and that once an arbitrator-Chairman started the arbitration proceedings thereafter the High Court is not justified in appointing an Arbitrator are concerned the aforesaid has no substance and can to be accepted in view of the decision of this Court in TRF Limited Judgment(supra), Bharat Broadband Network Judgment(supra), Voestalpine Schienen Judgment (supra). In the aforesaid decisions this Court had an occasion to consider in detail the object and purpose of insertion of Sub-Section 5 of Section 12 read with 7 th Schedule to the Act. In the case of Voestalpine Schienen Judgment(supra) it is observed and held by this Court that the main purpose for amending the provision was to provide for 'Neutrality of Arbitrators'. It is further observed that 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 7 th Schedule, he shall be ineligible to be appointed as an arbitrator. It is further observed that in such an eventuality i.e. when the arbitration clause finds foul with the amended provisions (Sub-Section 5) of Section 12 read with 7 th Schedule the appointment of an Arbitrator would be beyond pale of the arbitration agreement, empowering the Court to appoint such arbitrator as may be permissible. It is further observed that , that would be the effect of non- obstante clause contained in Sub-Section5 of Section 12 and the other party cannot insist on appointment of the arbitrator in terms of the arbitration agreement..........
It is further observed and held by this Court in the aforeasaid decision that independence and imparitality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which shall apply to all judicial and quasi- judicial proceedings. It is further observed that 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 would render him ineligible to conduct the arbitration.
(Emphasis Supplied) Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 23 of 45
28. In another case title Ellora Papermills Vs. State of M.P., (2022) 3 SCC 1 Hon'ble Supreme Court on 04.01.2022 dealt with a matter wherein the dispute pertained to year 1993-94 and the Arbitral Tribunal consisting of officers of State of MP was constituted much prior to promulgation of 2015 Amendment and inclusion of Section 12(5) and 7th Schedule w.e.f. 23.10.2015. High Court did not interfere with the Tribunal citing the reason that the Tribunal started functioning prior to 23.10.2015 and that the appellant had already participated in the proceedings. Hon'ble Supreme Court while relying on TRF Limited, Bharat Broadband, Voestalpine and Ajay Sales Judgments stressed that 'Neutrality of Arbitrators', their independence and imparitality is critical for the entire process. The Bench reiterated, "Though, the Law Commission discussed the aforesaid aspect under the heading "Neutrality of Arbirators", the focus of discussion was on imparitality and independenceof the arbitrators which has relation to or bias towards one of the parties. In the field of international arbitration, neutrality is generally related to the nationality of the arbitrator. In international sphere, the "appearnace of neutrality" is considered equally important, which means that an arbitrator is neutral if his nationality is different from that of the parties. However, that is not the aspect which is being considered and the term "neutrality" used is relatable to imparitality and independence of the arbitrators, without any bias towards any of the parties. In fact, the term "Neutrality of Arbitrators" is commonly used in this context as well........
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 7 th 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 arbitration agreement.
Ex. (Comm.)No. 188/22Bajaj Housing Finance Ltd. Vs. Babita Rawat page 24 of 45
29. In case title SMS Limited Vs. Rail Vikas Nigam Limited18, wherein Hon'ble Delhi High Court dealt with an aspect where Railways claimed that it is offering a panel of 37 names for selection of the Arbitrator but the same was opposed by the plaintiff company as the proposed Arbitrators were primarily retired Railway Officers and few of them were from other PSUs. While referring to Voestalpine Judgment and Perkins Eastman Judgment of Hon'ble Supreme Court it was ruled by Hon'ble Delhi High Court that, " It is pertinent to note that in case of Perkins Eastmen the Supreme Court while dealing with the application under Order 7 Rule 6 read with Section 11(12)(a) of the Act held that as per scheme of Section 11 of the Act if there are justifiable doubts as to the independence and impartiality of the person nominated and if other circumstances warrant appointment of an independent arbitrator by ignoring the procedure prescribed, an appointment can be made by the Court,".
30. In case title Proddatur Cable TV Digi Services Vs. Siti Cable Network Ltd.19, Hon'ble High Court of Delhi dealt with a case where appointment of the Arbitrator was challenged on the ground that the Arbitrator was 'Unilaterally Appointed' in violations of TRF Judgment and Perkins Eastman Judgment of Hon'ble Supreme Court. The relevant para of the judgment of Hon'ble High Court is reproduced as under:
"Lastly the reliance of the respondent on the judgment of the Supreme Court in the case of Central Organisation is also of no avail to the respondent. In the said case, the Supreme Court was dealing with an arbitration clause which required a panel of arbitrators to be provided by the Railways to the other party to the contract, in terms of clause 64.3(a)(ii) of the GCC. The Court held that since one party was to provide a panel and the other party had the choice to short list the Arbitrator of its choice from the panel and only from the shortlisted names, Railways was bound to appoint at least one Arbitrator to constitute the Arbitral Tribunal, the parties had a level playing filed. The Arbitrator appointed by the Railways of its choice was balanced by the second Arbitrator being of the choice of the other party. Thus, the elements of fairness, transparency and impartiality were taken care of."
18 2020 Latest Caselaw 190 Delhi 19 2020 Latest Caselaw 328 Delhi Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 25 of 45
31. In case title City Lifeline Travels Pvt. Ltd. Vs. Delhi Jal Board 20, Hon'ble High Court of Delhi ruled that, "The contention that the decision in the case of Perkins Eastman ought to be read in a restrictive manner is not persuasive. On the contrary, the said decision must be read in expansive manner. The efficacy of arbitration as an alternate dispute resolution mechanism rests on the foundation that the disputes would be adjudicated by independent and impartial arbitrators. The decision in Perkins Eastman recognizes the importance of ensuring that Arbitrators not be appointed by persons who are otherwise interested in the matter so as to obviate any doubt as to the impartiality and independence of the Arbitral Tribunal. The necessity for instituting necessary safeguards for the same cannot be understated."
(Emphasis Supplied)
32. In case title Abraham Memorial Education Trust Vs. Prodigy Development Institution21 Delhi, dated 03.03.2021 Hon'ble High Court dealt with the award which was passed Ex-Parte by 'Unilaterally Appointed Arbitrator' and held, "Since the Arbitrator's appointment was contrary to the provisions of Arbitration Agreement and Act, the unilateral reference of disputes and the proceedings before the Sole Arbitrator are void ab initio and the award so rendered is a nullity in law. Hence, the impugned award cannot be sustained and the Court has no hesitation in setting aside the award and it is ordered accordingly."
(Emphasis Supplied)
33. In case title M/s Fam Bhagat Infratech Private Limited Vs. Alok Kumar Agarwal22, Hon'ble High Court while dealing with the challenge to Arbitral Clause which provided that 'Unilateral Appointment of Arbitrator' ruled, "Clearly, in view of the law laid down by the Supreme Court in Perkins Eastman and Bharat Broadband as well as Section 12(5) of the Arbitration and Conciliation Act, 1996, read with the 7 th Schedule thereto, Clause 9.1 is rendered unsustainable in law, as it confers exclusive jurisdiction to one of the parties to the arbitration agreement to appoint the arbitrator.
(Emphasis Supplied) 20 2021 Latest Caselaw 276 Delhi 21 OMP (Comm.) 391 of 2020 22 2021 SCC Online Delhi 2486 Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 26 of 45
34. In case title M/s India Cements Capital Limited Vs. William 23, Hon'ble Kerala High Court at para no. 20 observed that,
20."Petitioner's contention that if an award is declared to be a nullity in execution proceedings, it will amount to adding one more ground to Section 34 of the Act is totally unacceptable. As mentioned earlier, Section 34 of the Act provides seven grounds to set aside an award. If the expression "set aside" is understood correctly, there will not be any lack of clarity or obfuscation. Ordinarily, the expression "set aside" is understood as meaning abandon, abjure, abrogate, discard, dispense with, to omit, reject, repudiate, etc. The term "set aside" is defined in Black's Law Dictionary (8th Edition) as vb.(of a court) to annul or vacate ( a judgment, order, etc.). The term "set aside" in the legal parlance means, to cancel, annul or revoke a judgment or order. It is an indisputable proposition that in order to set aside a decree or order or award, there must be one in existence. In other words, a decree or award not in existence cannot be set aside. No one can seek to set aside a decree or award which is not in existence. That exercised will be as futile, rather as impossible, as one attempting to commit feticide of an unborn foetus. Therefore, what is provided in Section 34 of the Act is only ways and means to set aside an award made in an arbitral proceedings. As succintly stated by the Hon'ble Supreme Court, what is sought to be achieved by taking recourse to Section 47 of the Code is to make a declaration that the decree(here, an award) sought to be executed is a nullity. In other words, seeking a pronouncement that there is no executable decree of award at all. If the end result of an adjudication under Section 47 of the Code is entering a finding that there is no decree or award at all, there cannot be a question of setting aside such a decree of award in that proceedings. Therefore, the contention of the revision petitioner that the declaration of nullity of an award in a proceeding under Section 47 of the Code will tantamount to adding one more ground to Section 34 of the Act is legally incorrect and therefore, not acceptable."
35. The celebrated judgments of TRF Limited, Perkins Eastman Hon'ble Supreme Court have been relied by other High Courts as well.
36. In case title Ravi Realcons Pvt. Ltd. Vs. Chief Engineer and Anr.24 Hon'ble High Court of Calcutta observed, " In the light of judgments in TRF Limited and Perkins Eastman in Section 12(5) of the Arbitration and Conciliation Act, it is clear that a person who may have an interest in the outcome of the dispute should not be made an Arbitrator."
37. While distinguishing the judgment of CORE judgments of Hon'ble Supreme Court on facts this Bench went on to rule that, 23 2015 SCC OnLine Ker 24805 24 2022 SCC Online CAL 751 Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 27 of 45 "The judgments in CORE judgment are justiciable on facts as the same relate to appointment of arbitrator as per Arbitration Clause has not dehorsed the ratio of Perkins Eastman.
38. In case title Priya Mallaiseth Vs. VLCC Healthcare Limited 25, Hon'ble Delhi High Court ruled, "The arbitration agreement between the parties as noted above is not in dispute. Firstly considering Mr. Sethna's second contention that Clause 13.1 when it confers an authority on the respondent to appoint an arbitrator, it would be rendered bad in law in view of the principles of law as laid down by the Supreme Court in Perkins Eastman needs acceptance adverting to the principles of law as laid down in these decisions. Applying these principles the respondent cannot have a unilateral authority to appoint an arbitral tribunal."
39. In case titled Kotak Mahindra Bank Ltd. Vs. Narender Kumar Prajapat and Ors., 2023 Latest Caselaw 709 Del dated 23.11.2022 passed by this Court wherein Hon'ble High Court upheld the said order and observed that:
"This Court finds no infirmity with the aforesaid view of (District Judge, Commercial Court). A person who is ineligible to act an Arbitrator, lacks the inherent jurisdiction to render an Arbitral Award under the A&C Act. It is trite law that a decision, cannot be considered as valid. Thus clearly such an impugned award cannot be enforced".
40. Owing to inherent illegality in 'Unilateral Appointment of Sole Arbitrators' by one of the disputing parties is now so well established by Parliament and the Hon'ble Supreme Court that in several cases the parties themselves concede to this Legal Position and accept that unilateral appointment made by them may be set aside. In case titled Ekta Medical Systems Private Limited Vs. Institute of Liver and Biliary Sciences 26, when the petitioner raised the issue of unilateral appointment and carrying on of arbitral proceedings in violation of Section 12(5) read with Schedule 7 of the Act while citing Perkins Eastman. Ld. Counsel for respondent, simply conceded to the legal position and paved the way for appointment of a neutral arbitrator by the High Court. Hon'ble Delhi High Court ruled that, 25 2022 SCC Online Del 1137 26 2021 SCC Online DEL 3979 Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 28 of 45 "The petitioners, by this petition, seek termination of the mandate of the arbitrator, presently in seisin of the disputes between the parties in view of Section 12(5) of the Arbitration and Conciliation Act, 1996 ("the 1996 Act") read with judgments of the Supreme Court in Bharat Broadband Network Ltd. Vs. United Telecoms Ltd., Perkins Eastman Architects DPC vs. HSCC(India) Ltd. And Haryana Space Application Centre Vs. Pan India Consultants Pvt. Ltd........ Mr. Sanjay Poddar, learned Senior Counsel for the respondent, fairly concedes to the applicability of Section 12(5) of the 1996 Act as well as the aforesaid decisions and, therefore submits that this Court may appoint an arbitrator in place of the arbitrator presently in seisin of the disputes."
(V) UNCITRAL Model Law on Commercial Arbitration 1985 and UNCITRAL Arbitration Rules, 2021 proscribe and forbid Unilateral appointent of Sole Arbitrator by a disputing party.
41. The first statutory enactment on arbitrations in India was in the 19 th Century i.e. Indian Arbitration Act, 1899. It was replaced by Arbitration Act, 1940. However, in so far as the 1940 Act was found to be largely dependent on Judicial interventions and the Awards passed had no finality till such time they were made a 'Rule of Court by a Civil Court, Parliament of India decided to re-enact the Law of Arbitration in India on the lines of United Nations Commission on International Law (UNCITRAL) Model Law on Commercial Arbitration 1985. While adopting the same the current Arbitration and Conciliation Act, 1996 was promulgated and notified on 22.08.1996.
42. In the latest UNCITRAL Arbitration Rules adopted in 2021 under Section II "Composition of Arbitral Tribunal". Articles 8, 9 and 10 pertain to appointment of arbitrators, it is specifically provided that in case it is agreed that the dispute shall be resolved through 'Sole Arbitrator', the parties have only 2 options.
First: They can mutually agree on the name of a Sole Arbitrator within 30 days of invocation of arbitration. OR Second: In case no agreement is reached on the mutually acceptable Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 29 of 45 name, party can make a request to the "Appointing Authority" who in turn will appoint a neutral and impartial Sole Arbitrator.
43. Article 6 of the UNCITRAL Arbitration Rules 2021 governs designation of "Appointing Authority" it provides that if the parties do not reach an agreement on designation of Appointing Authority, a party can propose the name of one or more institutions or persons including Secretary General of Permanent Court of Arbitration (PCA) at The Hague. Once the name is proposed and no consensus is reached between the disputing parties out of the institutions and names proposed within 30 days, by default Secretary General of PCA would become Appointing Authority in the matter.
44. The sum and substances that at no point of time either of the disputing party can be allowed to unilaterally appoint a Sole Arbitrator in its own dispute. The insistence on the part of NBFCs and PSUs to continue to unilaterally appoint Sole Arbitrators of their choice is in clear violation of UNCITRAL Model Arbitration Rules and is blatant violation of Full Bench decision of Hon'ble Supreme Court in TRF Limited.
(VI) Legal position on unilateral appointment of Sole Arbitrator in other countries
45. Neutrality in arbitration has been adopted as a touchstone for fair and impartial arbitration and 'Equality of the Parties' World over.
46. United Kingdom: As per Section 16-18 of Arbitration Act the default mechanism for appointment of arbitrators when the Tribunal consists of a Sole Arbitrator provides that such an Arbitrator shall be jointly appointed by the parties within 28 days upon invocation of Arbitration Clause.
Ex. (Comm.)No. 188/22Bajaj Housing Finance Ltd. Vs. Babita Rawat page 30 of 45
47. France: In a very famous French Judgment of Siemens AG & BKMI Industrienlagen GMBH Vs. Ducto Consortium Construction Co., also famously known as the "Ducto Case", the issue of equality as a matter of public policy in appointing an Arbitrator was discussed, way back in 1992. The agreement entered into between the parties had a multi-party arbitration agreement wherein, BKMI and Dutco the two defendants were requested to agree on a joint arbitrator, which was done under protest. This was subsequently challenged. ICC and Paris Court of Appeal did not see any problem with the appointment. However, the Cour de Cassation (French Supreme Court) set aside the order passed by the Paris Court of Appeal and considered the appointment process to be contrary to the public policy stating that the "equality of the parties in the appointment of arbitrators is a matter of public policy which can be waived only after the disputes has arisen."
48. As a result of this judgment, various arbitration institutions such as ICC, the German Institutions of Arbitration etc. provided for appointment of arbitrators by the institution wherein the parties are unable to agree on a joint arbitrator. Thus, party equality has been well-recognised internationally since decades.
The landmark Ducto Case has been followed by Hon'ble Supreme Court in Perkins Eastman, "An independent mind is indispensable in the exercise of judicial powers, whatever the source of that power may be and it is one of the essential quality of an Arbitrator."
49. Russia: The rule of equlity of parties is strictly followed in arbitral proceedings in Russia. In case titled "Russia Telephone Company Vs. Sony Ericsson Communication Rus, Space no.1831/12, Presidum of the Supreme Commercial Court of Russia ruled that,"an arbitration clause that gave one of the parties the additional, unilateral option of referring Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 31 of 45 arbitration disputes is invalid.
(VII) Why NBFCs continue to impose their chosen Sole Arbitrator on the borrower and why there is resistance abiding Hon'ble Supreme Court ruled on TRF Limited, Perkins Eastman Judgments?
50. As detailed supra, the purpose and purport of Section 12(5) read with Schedule 7 is to instill neutrality, imparitality and fairness in Arbitrations in India. It has been ruled to be mandatory and binding on all concerned not only by Full Bench of the Hon'ble Supreme Court but also by Division Benches of Hon'ble Supreme Court as also followed by numerous judgments of Hon'ble High Court in Delhi and other High Courts of India. It is strange that the NBFCs like the award holder in the case in hand continue to do a shut-eye to the above legal provision and the binding dicta of the Supreme Court which as per Article 141 of the Constitution of India is Law of the Land and continue to appoint Sole Arbitrators unilaterally. The reluctance in having a neutral arbitrator for the purpose of adjudication of disputes is either rooted in lack of confidence on the merits of the dispute or just an act of sheer arrogance, indifference and non-abidance of the law. They seem to be toeing the same old line of taking a chance, with a mind that they would fall in line only when some objection is taken by the respondent at any point of time or some Court in some Order objects to the same. This conscious illegality which is continuing unabatedly in blatant violation of Statutory Laws and Law laid by Hon'ble Supreme Court needs to be stopped and curbed effectively.
Ex. (Comm.)No. 188/22Bajaj Housing Finance Ltd. Vs. Babita Rawat page 32 of 45 (VIII) Adverse effect of one sided arbitrators on "Enforcement of Contract component of "Ease of Doing Business" Ranking of India in World Bank's Doing Business Reports of Investment Friendly Nations.
51. Every Nation in the World today strives for improving Social and Economic well-being of its citizens. One of the sure way for any Economy to thrive is by attracting Foreign Direct Investment(FDI). World Bank has been preparing an 'Ease of Doing Business Report' of all countries of the World based on how investment-friendly the countries, its polices and infrastructure are for Foreign investors. The Annual Report consists of 10 components/parameters which included 'Enforcement of Contract' as well.
52. In the last around one decade as compared the Rank 142 in 2014, India's Rank in 'Ease of Doing Business' climbed to Rank 61 out of 191 odd countries. But still when we compare our ranking on the indicator "Enforcement of Contracts" it shows that we are still at the Rank 163. While Prime Minster of India has made a call to make India a 5 Trillion US Dollar Economy, the same can be achieved not only by strengthening our dispute resolution infrastructure and also by ensuring fair, neutral, time- bound adjudication of disputes not only before Commercial Courts in India but also before Arbitration Tribunal under Arbitration and Conciliation Act, 1996. One of the reason of inclusion of Section 12(5) read with Schedule 7 in the Act was to instill transparency and fairness in appointment of Arbitrators and bringing an end to the era of unilateral appointment of chosen Sole Arbitrators. In today's digitally connected World, unethical Arbitral Proceedings can't hidden on remain localised. If we wish to make Government of India's call for 'Resolve in India', a reality we have to work on Ethics, Neutrality and Efficiency of our Arbitration Infra. We will never be able to create Indian version of ICA (Paris), LCIA (London) and SIAC (Singapore) if we do not respect judgments of Hon'ble Supreme Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 33 of 45 Court and UNCITRAL Model Laws on Arbitration on Ethical Arbitrations.
(IX) Ad-hoc Arbitrations by Unilaterally Appointed Sole Arbitrators weakening people's faith in Arbitration as an ADR.
53. While Ad-hoc Arbitrations by Tribunals appointed with concurrence of the parties or those appointed by Hon'ble High Courts under Section 11 of the Act are working in a neutral and impartial manner but Arbitration proceedings carrying out by unilaterally appointed Ad-hoc Arbitrators are totally working in a one side manner without adhering to either the celebrated Principles of Natural Justice of being neutral and unbiased or sticking to Judicial Ethics as applicable to them in so far as they are performing adjudicatory function under Law promulgated by Parliament of India. More so when Awards passed by them have the strength of a decree of a Civil Court.
(X) Justice B. N. Srikrishna Report on Arbitration stressed on strengthening 'Institutional Arbitration Centres' in India
54. A Committee was constituted by Govt. of India led by HMJ B. N. Srikrishna. It also included HMJ Indu Malhotra and HMJ P.S. Narsimhan (before they joined the Bench) as also other legal stalwarts namely Justice R.V. Ravindran Retired Judge, Hon'ble Supreme Court and Sh. K. K Venugopal, Attorney General of India, to analyze what is ailing Arbitration in India. One of the major suggestions made by Justice B. N. Srikrishna Report on Arbitration was to give impetus to Institutional Arbitration Centers which are incorporated under Section 8 of the Companies Act, 2013 or registered under Societies Act, 1860. One of the reasons cited by the Report as to why for parties are not availing the services of Institutional Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 34 of 45 Arbitration and prefer Adhoc Arbitration was that Adhoc Arbitration allows them to choose the Sole Arbitrator of their choice. It is this menace which is supposed to be corrected by Section 12(5) read with Schedule 7.
55. On account of non-abidance to these statutory binding provisions and adherance to the binding judgments of the Apex Court, quality of the ex- parte awards being doled by in-house Sole Arbitrators who are appointed unilaterally, the arbitration environment in the country is getting vitiated. It is being used by the NBFCs for extracting money with exorbitant interest from the borrowers. This is eroding society's faith in Arbitration as a mode of ADR as provided under Section 89 CPC. Arbitration in India is more than 120 years vintage but still the failure to maintain the neutrality and fairness in the entire process, including appointment of arbitrator, is doing a lot of disservice to the concept as a whole and is leading to financial anarchy in the Country.
56. During the course of arguments it is submitted on behalf of the execution petitioner that in India the term "Institutional Arbitration"
stands defined in Section 2(ca) of The Act which reads as under:
"Arbitration Institution means an arbitral institution designated by the Supreme Court or a High Court under this Act."
57. The correct legal position on the above definition is that although the above definition was proposed by Arbitration and Conciliation (Amendment) Act, 2019 i.e. Act no. 33 of 2019 but the same is yet to be notified and is as such not binding law in Arbitral arena. Moreover, the proposed amendment of the Act talks of constituted an 'Arbitration Council of India' which, in turn, will prepare a list of Arbitration Institutions on the basis of infrastructure, calibre of arbitrators, performance, compliance of time limits etc. As per proposed amendment, under Section 11(3A) of the Act, the designation of institutions by the Hon'ble Supreme Court and the High Courts is to be carried out only as per Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 35 of 45 the proposal made by the 'Arbitration Council of India'. This Court is apprised by Ld. Counsel for the plaintiff that the controlling Ministry of Arbitration and Conciliation Act, 1996 under Allocation of Business Rules, 1961 is Ministry of Law and Justice, Govt. of India. It is submitted that the Law Ministry, Govt. of India has already prepared and notified a Pan India "List of Arbitral Institutions" offering quality Arbitration and Mediation services and the same is available in public domain.
(XI) Unilateral appointment of Arbitrator is Anti-thesis to "Nemo Judex in causa cua"- "No one can be a Judge in his own case".
58. "Nemo Judex in causa cua"- "No one can be a Judge in his own case"
is one of the most fundamental Principles of Natural Justice which is soul and fulcrum of any judicial or quasi-judicial process. As opined by Law Commission of India in its Reports, Parliament of India in the 2015 Amendment of Arbitration and Conciliation Act, 1996 and repeatedly ruled by authoritatively judgments of Hon'ble Supreme Court, 'Neutrality of Arbitration Proceedings' cannot be allowed to be succumb or got highjacked by insistence of a large section of NBFCs and other Corporations to continue to violate the impartiality, probity and unbiasedness of arbitration proceedings in the country.
59. The unilateral appointment of arbitrators is germane to this vice and when the first step is taken in a wrong direction and is rendered non est, every next step and the culmination of the arbitral journey into an award is nothing but a zilch or nullity.
Ex. (Comm.)No. 188/22Bajaj Housing Finance Ltd. Vs. Babita Rawat page 36 of 45 (XII) Whether CORE Judgment has over-ruled TRF Limited Judgment of Hon'ble Supreme Court?
60. It is submitted by Ld. Counsel for the Execution Petitioner that the mandate of TRF Limited (Full Bench) and Perkins Eastman are over- ruled by Central Organisation for Railway Electrification Vs. ECI- SPIC-SMO-MCML(JV)27, a Three-Judge Bench of the Supreme Court. In CORE Judgment the Apex Court allowed the appointment of Arbitral Tribunal from a panel maintained by Railways. The Bench was of the view that since Contractor/opposite party was allowed to choose two names out of a panel of 4 retired railway officers, Arbitral Tribunal, Section 12(5) of the Act is not violated and concerns of TRF Limited stands addressed.
61. This CORE Judgment came for scrutiny before Hon'ble Supreme Court in Union of India Vs. Tantia Construction Limited SLP(c) 12670/2020 decided on 11.01.2021 by another Three-Judge Bench of the Apex Court led by HMJ R. F Nariman. It was found that CORE Judgment is in contradiction of TRF Limited and an order was passed requesting the Hon'ble Chief Justice of India to constitute a 'Larger Bench' for adjudicating on the correctness of the CORE judgment. The relevant para of abovementioned judgment is reproduced as under:
"Having heard Mr. K. M. Nataraj, learned ASG for some time, it is clear that on the facts of the case, the judgment of the High Court cannot be faulted with. Accordingly, the Special Leave Petition is dismissed. However, reliance has been placed upon a recent 3-Judge Bench decision of this court delivered on 17.12.2019 in Central Organisation for Railway Electrification Vs. ECI- SPIC-SMO-MCML(JV) (2020) 14 SCC 712. We have perused the aforesaid judgment and prima facie disagree with it for the basic reason that once the appointing authority itself is incapacitated from referring the matter to arbitration, it does not then follow that notwithstanding this yet appointments may be valid depending on the facts of the case. We therefore request the Hon'ble Chief Justice to constitute a larger Bench to look into the correctness of this judgment. Pending application stands disposed of."
(Emphasis Supplied) 27 (2020) 14 SCC 712 Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 37 of 45
62. Even otherwise once a Three-Judge Full Bench of Hon'ble Supreme Court has already laid the law in TRF Limited as per well-established judicial norms, a co-equal Bench of 3-Judge of Hon'ble Supreme Court in CORE Judgment cannot set aside, dilute or vary the earlier laid law on the subject.
63. While discussing this aspect in a recent case of Hon'ble Delhi High Court titled as Overnite Express Limited Vs. Delhi Metro Rail Corporation28, pronounced on 02.08.2022, trashed the plea of DMRC that it had offered a panel of 5 retired judicial officers when the plaintiff proposed a name of a retired High Court Judge as its nominee. A plea was raised by DMRC before the Hon'ble High Court that since neutrality and impartiality of retired Judicial officers cannot be questioned and reliance was placed on the CORE judgment, Hon'ble High Court while relying Voestalpine Judgment concluded that offering a panel of 5 names by one party to the opposite party is no longer a valid procedure. It was ruled:
"The procedure of forwarding a panel of five names to the other contracting party to choose its nominee Arbitrator is now held to be no longer a valid procedure.........
The respondent has no doubt given a panel of five retired District Judges, but it cannot be overlooked that it is a restrictive panel restricting the choice of the petitioner to pick up any one of those five which tantamounts to unilateral appointment of an Arbitrator by the Respondent, which may create a doubt about the Arbitrator being partial or biased. Though one may hasten to State and emphasise that the retired District Judges may be person of impeccable integrity, but the issue here is of a perceived bias which cannot be permitted. Hence, it is held that the procedure adopted by the respondent for appointment of Arbitrator from the panel cannot be sustained in the light of the observations of the Apex Court in Voestalpine Schienen GMVH Vs. Delhi Metro Rail Corporation Ltd. (2017) 4 SCC 665.
(Emphasis Supplied)
64. In case title Konodia Infratech Limited Vs. Dalmia Cement (Bharat) Limited29, Hon'ble Delhi High Court dealt with the objection petition under Section 34 of the Act wherein issue of "Unilateral 28 2022 SCC Online Del 2488 29 2021 Latest Caselaw 2975 Del Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 38 of 45 Appointment of Sole Arbitrator" was raised for the first time. While upholding the arbitral award Hon'ble High Court cited following reasonings:
(a) That objector withdrew Section 9 application from the High Court with liberty to approach Sole Arbitrator under Section 17 of the Act.
(b) That Objector filed a Section 16 application challenging the composite reference of dispute but not raising the unilateral appointment of Sole Arbitrator.
(c) That the Objector himself filed counter-claim before the unilaterally appointed Sole Arbitrator without protest.
(d) That the Objector give consent for explanation of time under Section 29A of the Act during the proceedings.
65. It was ruled by the Hon'ble High court that despite being aware of authoritative judgments of TRF Limited and Perkins Eastman the Objector did not raise any objection qua the unilateral appointment of the Arbitrator and constituted to participate in the proceedings.
66. The circumstances and unique facts in the cited case do not relate with the facts of the case in hand even remotely in so far as there was no participation on the part of Judgment Debtor unlike the cited case. As such this judgment is of no avail to the execution petitioner in this matter. Moreover in case titled AK Builders vs DSIDC30, a co-equal Bench of Hon'ble Delhi High Court expressed reservation regarding the findings of Kanodia Judgement. The Bench held that mere participation in proceedings before a unilaterally appointed Arbitrator does not constitute waiver of Section 12(5) r/w Sch. 7 of the Act. While relying on TRF Ltd, Perkins Eastman and Bharat Broadband Judgements of Hon'ble SC the unilaterally appointed Arbitrator was removed and replaced.
67. Post the passing of CORE Judgment, a section of arbitration litigants, specially Central/State Governments, Ministries and Public Sector Undertakings started projecting that they are no longer governed or covered by Three-Judge TRF Judgment Perkins Eastman Judgment and Voestalpine Judgment of Hon'ble Supreme Court and that now they are all 30 2022 Latest Caselaw 606 Del Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 39 of 45 free to appoint their arbitrators out of a panel which they maintain by picking and choosing names continued to them.
68. As mentioned supra, another Three-Judge Bench led by HMJ R.F. Nariman in Tantia Construction took cognizance of this situation and on 11.01.2021 i.e. within less than one month of passing of CORE Judgment expressed its disagreement over the reasoning and conclusions arrived at in CORE Judgment. The Bench expressly said that once the Appointing Authority itself is incapacitated how can such an Authority be permitted to appoint arbitrators in its own dispute. And the matter was referred to the Chief Justice of India for constituting a larger Bench to decide on the correctness of the CORE Judgment.
69. Evidently, constitution of a Five-Judge Bench to look into the correctness of Three-Judge CORE Judgment may take some time but in the interregnum the Law already laid by Three-Judge TRF Judgment in 2017 shall continue to be the binding law totally unaffected and unchanged by the observations made by co-equal Bench in Three-Judge CORE Judgment.
(XIII) Conclusion Conclusion A: Execution Court duly empowered under Section 47 CPC to refuse Execution of Ex-Parte Awards passed by Unilaterally Appointed Arbitrators.
70. In the light of above discussion and appraisal of the facts of the case in the light of taking note of consistent judgments of Hon'ble Supreme Court, Delhi High Court and other High Courts covering aspect of powers of Execution Court under Section 47 CPC it is found that the arbitral award in question is prima facie suffering from a substantive error which cause to the root of the matter in so far as it was passed ex-parte by a 'Unilaterally Appointed Arbitrator.' Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 40 of 45 Conclusion B: Awards passed by Unilaterally Appointed Sole Arbitrators are nullity and Non-Executable.
71. Unilateral Appointment of Sole Arbitrator is non est and void ab initio. Awards passed by such a Tribunal is 'Non-Executable". The statutory provision of Section 12(5) read with Schedule 7 of the Act duly explained by full Bench of Hon'ble Supreme Court in TRF Judgment and other Supreme Court judgments namely Perkins Eastman, Bharat Broadband and several judgments of the Hon'ble High Court of Delhi it is found that as per legal position as it exists as on date, the unilateral appointment of Sole Arbitrator was void ab initio, non-est and a nullity. The proceedings carried out by such unilaterally appointed arbitrator Ex-Parte and the awards sought to be executed is found to have been passed with inherent lack of jurisdiction. As such, this Court is of the firm view that the Award under Execution is rendered 'Non-Executable'.
(XIV) Petition seeking execution of Ex-Parte Award passed by a Unilaterally Appointed Arbitrator is like reaping benefits of one's own wrong-doing and is abuse of Court process.
The above detailed discussion fairly brings to the fore one fact that 'Unilateral Appointment of Arbitrators' by the NBFCs is nothing but a blatant violation and disregard of Law laid by Full Bench of Hon'ble Supreme Court and is akin to Contempt of Court. Filing a petition seeking execution of such Ex-Parte Awards obtained through such Unilateral Appointments is nothing but a classic example of abuse the process of Courts by Award Holders to extract money out of the hapless respondents who more often than do not have any clue about the very initiation, holding of proceeding and passing of such like Ex-Parte Arbitral Awards before the Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 41 of 45 chosen Sole Arbitrators in an assembly line like fashion. Neither the letter of assignment of dispute to the arbitrator nor the declaration furnished by the Arbitrator or the Award sought to be executed through the petition in hand have reference to any of the above catena of landmark authoritative judgments of Hon'ble Supreme Court and Hon'ble High Courts.
72. It is appalling to observe that the Execution Petitioners are determined to scorn and ignore with impunity the binding Law of the Land and still gather courage to approach the Courts of Law with their unclean hands to seek and abuse the due process of law in reaping benefits of such ill-gotten Arbitral Awards.
73. In Halsbury's Laws of England, (4th Edn.,Vol. 9, Paragraph 38) , there is a brief discussion of when "Abuse of the Process of the Court"
may be a punishable contempt. It is said :
" Abuse of process in general. The Court has power to punish as contempt any misuse of the court's process. Thus the forging or altering of court documents and other deceits of like kind are punishable as serious contempts. Similarly, deceiving the court or the court's officers by deliberately suppressing a fact, or giving false facts, may be a punishable contempt."
74. In case titled S.P. Chengalvaraya Naidu Vs. Jaganath31, Hon'ble Supreme Court observed :
"The Courts of Law are meant for imparting justice between the parties. One who comes to the court , must come with clean hands. We are constrained to say that more often then not, process of the court is being abused . Property - grabbers tax-evaders, bank-loan-dodgers and other unscrupulous persons from all walks of life find the court process a convenient level to retain the illegal gains indefinitely. We have no hesitation that a person whose case is based on falsehood has no right to approach the court. He can be summarily thrown out at any stage of litigation."
75. In case titled C.B. Aggarwal Vs. P. Krishna Kapoor32, Hon'ble Delhi High Court observed:
"It is true that in a civilised society, legal process is the machinery for keeping order and doing justice. It can be used properly or it can be 31 AIR 1984 SC 853, 1993 Latest Caselaw 451 SC 32 AIR 1995 Delhi 154 , 1994 Latest Caselaw 764 Del Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 42 of 45 abused. It is used properly when it is invoked for vindication for men's right and enforcement of just claims. It is abused when it is diverted from its true course so as to serve extortion or oppression; or to exert pressure so as to achieve an improper end."
In case titled Curtis-Raleighquoted in Jennison v. Baker (1972) 1 All ER 997 at p. 1006. it is said "The law should not be seen to sit by limply, while those who defy it go free, and those who seek its protection lose hope"
76. The Division Bench of Delhi High Court in case titled Indian Steel & Wire Products Vs. B.I.F.R. 33held that "The sole purpose of filing the petition was to sabotage the proposal/scheme of TISCO which was accepted by the BIFR. The court held that the petitioner- company's false offer and undertaking has delayed the implementation of the scheme and the interest of workers and other creditors have suffered. The court held that the petitioner had not approached the court with clean hands and that such practice and tendency needed to be strongly discouraged and effectively curbed so that "in future, the petitioner and such like litigants should not gather the courage of abusing the process of law for ulterior motives and extraneous considerations. Such motivated petitions pollute the entire legal and judicial process which seriously affects the credibility of this system".
77. Plain reading of the above salutory judgments shows that such actions of the Execution Petitioner deserves to be resisted and treated as gross abuse of legal process. Such litigants deserves to be imposed exemplary costs as ruled in-
78. In Morgan Stanley Mutual Fund Vs. Kartick Das34, Hon'ble SC dealt with the issue and with intention to:
"Discourage speculative and vexatious litigation and judicial adventurism. "There is an increasing tendency on the part of the litigants to indulge in speculative and vexatious litigation and adventurism which the fora seem readily to oblige. We think such a tendency should be curbed. Having regard to the frivolous nature of the complaint, we think it is a fit case for award of costs, more so, when the appellant has suffered heavily. Therefore, we award costs of Rs.25,000/- in favour of the appellant."
79. In Chandra Shashi v. Anil Kumar Verma35, Hon'ble Supreme Court observed :
"The stream of administration of justice has to remain unpolluted so that purity of court's atmosphere may give vitality to all the organs of the State. Polluters 33 2004 (110) DLT 186, 2003 Latest Caselaw 1392 Del 34 (1994) 4 SCC, 225, 1994 Latest Caselaw 336 SC 35 (1995) 1 SCC 421, 1994 Latest Caselaw 573 SC Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 43 of 45 of judicial firmament are, therefore, required to be well taken care of to maintain the sublimity of court's environment; so also to enable it to administer justice fairly and to the satisfaction of all concerned.... Anyone who takes recourse to fraud, deflects the course of judicial proceedings, or if anything is done with oblique motive, the same interferes with the administration of justice. Such persons are required to be properly dealt with, not only to punish them for the wrong done, but also to deter others from indulging in similar acts which shake the faith of people in the system of administration of justice..... To enable the courts to ward off unjustified interference in their working, those who indulge in immoral acts like perjury, prevarication and motivated falsehoods have to be appropriately dealt with, without which it would not be possible for any court to administer justice in the true sense and to the satisfaction of those who approach it in the hope that truth would ultimately prevail. People would have faith in courts when they would find that 'Satyameva jayate' (truth alone triumphs) is an achievable aim there; or 'Yato Dharmstato Jaya' (it is virtue which ends in victory) is not only inscribed in emblem but really happens in the portals of courts.
The legal position thus is that if the publication be with intent to deceive the court or one made with an intention to defraud, the same would be contempt, as it would interfere with administration of justice. It would, in any case, tend to interfere with the same. This would definitely be so if a fabricated document is filed with aforesaid mens rea.
80. In Kishore Samrite Vs. The State of UP36, Hon'ble Supreme Court expounded that:
"As and when the Courts found that a litigating party is abusing the Court process and had approached the Court with unclean hands without disclosing complete facts, they shall be burdened with exemplary and deterrent cost. In the cited case while observing that the petitioner have misused the judicial process, a cost of Rs.5 lacs was imposed."
81. It is pertinent to mention here that all the NBFCs are functioning in India under business licence from Ministry of Finance, Govt. of India or a dual licence from MoF as also RBI. It is expected of such NBFCs which has Pan India presence and are important player in financial infrastructure of developing Nation that they shall function within the sphere of procedure duly established by Law and shall never cross the Lakshman Rekha set by governing statutes, bye-laws and binding authoritative Judgments of Hon'ble Supreme Court. Instead of aligning their Arbitration Agreements/Clauses and Arbitral Practices in consonance with Section 12(5) 36 (2013) 2 SCC 398, 2012 Latest Caselaw 606 SC Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 44 of 45 read with Schedule 5 & 7 of Arbitration and Conciliation Act, 1996 post its amendment in 2015, they continued to harp over their age-old law practices of having in-house Unilaterally Appointed Arbitrators. The NBFCs ought to have aligned their arbitral practices with the changing times as suggested by Justice B. N. Srikrishna Report on Arbitration dated 30.07.2017 and the 2015 and 2019 Amendments carried out in the Arbitration and Conciliation Act, 1996.
82. As guided by the afore-discussed binding judgments of Hon'ble Supreme Court and Hon'ble Delhi High Court, the Ex-Parte Arbitral Award dated 12.01.2022, passed by Unilaterally Appointed Sole Arbitrator namely Sh. Shirish Gadge is declared 'Non-Executable'. Considering this petition seeking execution of a clandestinely obtained Ex-Parte Arbitral Award as an 'Abuse of Court Process', the Execution Petitioner is burdened with cost of Rs.25,000/- to be deposited with Shahdara Bar Association (SBA) within 4 weeks. SBA shall use such funds for organizing Orientation Courses for young Members of the Bar for making them efficient Commercial Court practitioners and for honing their Advocacy Skills as Litigation Lawyers so that Justice Dispensation System is strengthened and Citizens get access to quality and timely Justice.
83. The Execution Petition is accordingly dismissed.
84. Copy of the order be sent to the address of the JD and Shahdara Bar Association by the Court staff for information.
85. File be consigned to Record Room after due compliance.
(SURINDER S. RATHI) District Judge Commercial Court-03 Shahdara District, KKD Delhi/21.08.2023 Ex. (Comm.)No. 188/22 Bajaj Housing Finance Ltd. Vs. Babita Rawat page 45 of 45