Delhi District Court
The Oxford School Of Education vs M/S Edu Smart Services Pvt Ltd on 27 April, 2024
IN THE COURT OF MS. NEELAM SINGH
DISTRICT JUDGE (COMMERCIAL)-02, SOUTH EAST
SAKET COURTS, NEW DELHI
OMP (COMM) No.- 2/2023
In the matter of
THE OXFORD SCHOOL OF EDUCATION
Bhagta Bajakhana Road,
Bhagta Bhaika, Punjab-151206 ......Petitioner
Vs.
1. M/s Edusmart Services (P) Ltd.
Registered office at:
L-74, Mahipalpur Extension,
New Delhi-110037
2. M/s Educomp Solution Limited
Having its office at:
1211, Padma Tower-1,
5, Rajendra Palace, New Delhi
110008
3. Ms. Rekha Gupta
Advocate-Cum-Sole Arbtritator
N-18, Second Floor, Jangpura Extn.
New Delhi-110014 .... Respondents
Date of Institution : 04.01.2023
Date of Final Arguments : 03.04.2024
Date of Judgment : 27.04.2024
Final Decision : Allowed
Section 34 Arbitration and Conciliation Act, 1996
1. The present petition, filed under Section 34 of the
Arbitration and Conciliation Act, 1996 ("the Act"), seeks to set
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M/s Edu Smart Services Pvt. Ltd.
aside the arbitral award dated 03.02.2018 issued by the Learned
Sole Arbitrator.
FACTUAL BACKGROUND
2. The Oxford School of Education (Petitioner) claims to have entered into a tripartite agreement with M/s Edu Smart Services Pvt. Ltd. and Others (Respondent No. 1 & 2) on 30.04.2010. The purpose of the agreement was to set up a smart class program at the Petitioner's institution. The Petitioner alleges that Respondent No. 1 & 2 failed to fulfill their obligations under the agreement and did not provide the promised hardware, software, support, and services. This resulted in losses for the Petitioner.
3. The Petitioner submitted that the ex-parte arbitral award dated February 3, 2018, passed by Ms. Rekha Gupta (Respondent No. 3) is illegal and unenforceable due to several irregularities in the arbitration process. The Petitioner asserts that they were not informed about the appointment of Ms. Rekha Gupta (Respondent No. 3) as the sole arbitrator. They argue that this appointment without their consent violates the principles of natural justice. The Petitioner claims that they never received any notice initiating arbitration proceedings against them. This absence of notice goes against the requirements laid out in Section 21 of the Arbitration and Conciliation Act, 1996. As the Petitioner was unaware of the OMP (COMM) 2/2023 The Oxford School of Education Vs. Page 2 of 16 M/s Edu Smart Services Pvt. Ltd.
arbitration proceedings, they were denied the chance to present their case and defend themselves.
4. The Petitioner further submitted that the Respondents have deliberately concealed the arbitration proceedings to obtain an ex- parte award in their favor. The Petitioner received a copy of the arbitral award on September 21, 2018, indicating a significant delay in their awareness of the arbitration process. The Petitioner previously filed a petition under Section 34 of the Act before the District Judge, Bhatinda, Punjab. However, this petition was returned due to a jurisdictional issue.
5. Given these arguments, petitioner filed the present petition to challenge the arbitral award that ruled in favor of respondents. Petitioner request the court to set aside this award.
Points of Consideration before the Court
6. I have heard the arguments and have perused the case file. This is an admitted fact that the moratorium issued under Section 14 of the Insolvency and Bankruptcy Code, 2016 had ceased to have effect forthwith by order of Hon'ble NCLT, New Delhi dated 09.10.2023 in respect of respondent no. 2.
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7. This petition under Section 34 of the Arbitration and Conciliation Act, 1996 (the Act) challenges the ex-parte arbitral award dated February 3, 2018, passed by Ms. Rekha Gupta (Sole Arbitrator) in favor of M/s Edu Smart Services Pvt. Ltd. & Ors. (Respondent No. 1 & 2). The Oxford School of Education (Petitioner) argues that the award is unenforceable due to a flawed arbitral process, specifically focusing on the appointment of the arbitrator.
8. In this case, the petition reveals a critical lapse. The Petitioner asserts that they were not informed about the appointment of Ms. Rekha Gupta as the sole arbitrator. There's no evidence suggesting any agreement between the parties regarding this appointment. The core issue in this case revolves around the appointment of the arbitrator. The Petitioner argues that the Respondent appointed the sole arbitrator without their involvement, constituting a significant breach of Section 12(5) of the Arbitration and Conciliation Act, 1996. This section explicitly lays down the framework for arbitrator appointment, stating:
"12(5) Where a number of arbitrators are to be appointed by the parties, the parties shall appoint the arbitrators in accordance with the agreement. If the parties fail to agree on the appointment of an arbitrator, the appointment shall be made, upon application by either party, by the court referred to in section 14."OMP (COMM) 2/2023 The Oxford School of Education Vs. Page 4 of 16
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9. The provision underscores the importance of mutual consent in arbitrator selection. A fundamental principle of arbitration is the impartiality of the arbitral tribunal. When one party unilaterally appoints the arbitrator, this essential principle is compromised. The specter of bias taints the entire process, raising doubts about the fairness of the outcome.
10. Law laid by Hon'ble Supreme Court in authoritative Judgments debarring "Unilateral Appointment of Sole Arbitrators":
(i) TRF Limited Vs. Energo Engineering Projects Ltd. ((2017) 8 SCC 377): In the TRF Limited case, Hon'ble Supreme Court held that when one party unilaterally appoints an arbitrator without the consent of the other party, it amounts to a breach of the principles of natural justice and fairness. The court emphasized the importance of neutrality and impartiality of arbitrators and ruled that such unilateral appointments are against the fundamental tenets of arbitration. This judgment laid down a significant precedent against unilateral appointments of arbitrators.
(ii) Voestalpine Schienen GMVH Vs. DMRC Ltd. (2017 4 SCC
665): In this case, Hon'ble Supreme Court reaffirmed the principle that unilateral appointments of arbitrators are against the OMP (COMM) 2/2023 The Oxford School of Education Vs. Page 5 of 16 M/s Edu Smart Services Pvt. Ltd.
principles of natural justice. The Court held that a party cannot appoint an arbitrator unilaterally if the arbitration agreement does not explicitly grant such authority. This judgment further supports the position against unilateral appointments.
(iii) Perkins Eastman Architects DPC Vs. HSCC India Ltd. (2020 20 SCC 760): Hon'ble Supreme Court, in this case, emphasized that an arbitration clause that allows one party to unilaterally appoint an arbitrator is against the principles of fairness and neutrality. It held that such clauses are not valid under the law, and an arbitrator should be appointed through a fair and impartial process.
(iv) Bharat Broadband Network Vs. United Telecoms Ltd. (2019 5 SCC 755): This judgment reiterated the principle that unilateral appointments of arbitrators are contrary to the principles of natural justice and fairness. Hon'ble Apex Court held that such appointments are invalid unless both parties explicitly agree to such a process in the arbitration agreement.
(v) HARSAC and Anr. Vs. Pan India Consultants (2021 3 SCC
103): In this case, Hon'ble Supreme Court emphasized the need for neutrality and impartiality in arbitration proceedings. It held that unilateral appointments of arbitrators are against these principles and should be avoided.
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11. These judgments collectively establish a clear stance against unilateral appointments of arbitrators and emphasize the importance of neutrality, fairness, and the consent of both parties in the arbitration process.
12. Hon'ble Delhi High Court in case title 'Man Industries (India) Limited Vs. Indian Oil Corporation Limited, OMP (COMM) 252/2018, dt. 01.06.2023' after considering the catena of judgments held as under :
"....11. He submits that in the present case, the petitioner has never challenged the eligibility of the learned Sole Arbitrator to adjudicate on the disputes between the parties. He submits that, in fact, the learned Arbitrator was appointed at the request of the petitioner. The learned Arbitrator before entering upon the reference submitted his disclosure as required under Section 12 of the Act. The petitioner never raised any objection to the eligibility of the learned Sole Arbitrator. Thereafter, the petitioner, in fact, twice filed applications under Section 29A of the Act seeking extension of the mandate of the learned Arbitrator. He submits that the filing of the application under Section 29A of the Act by the petitioner would, in fact, satisfy the Proviso to Section 12(5) of the Act and the ineligibility, if at all, attached to the learned Sole Arbitrator would be waived.
12. On the merits of the Arbitral Award, he submits that the agreement between the parties provides for a „Delay Delivery Discount‟ of a maximum of 10% of the total contract value. In the present case, the learned Arbitrator has found the petitioner guilty of delay in making supply of the pipes. Thereafter, in terms of the judgment of the Supreme Court in M/s Construction & Design Services v. Delhi Development Authority, (2015) 14 SCC 263, the learned Arbitrator has observed that the contract in question, being of public interest, there can be a presumption of the delay having resulted in damages to the respondent on account of such delay. He submits that the view taken by the learned Arbitrator is a plausible OMP (COMM) 2/2023 The Oxford School of Education Vs. Page 7 of 16 M/s Edu Smart Services Pvt. Ltd.
view and this Court in exercise of its limited jurisdiction under Section 34 of the Act would not be entitled to interfere in the same.
13. I have considered the submissions made by the learned counsels for the parties.
14. At the outset, it is important to emphasize that the respondent has not disputed that, though in terms of the Arbitration Agreement and on the request of the petitioner, the learned Arbitrator was appointed by the respondent alone. The Arbitration Agreement between the parties was contained in Clause 4.26.1 of the Special Conditions of Contract attached to the Purchase Order and is reproduced hereinbelow :-
"4.26.1 Any dispute or difference of any kind at any time(s) between the Purchaser and the vendor arising out of in connection with or incidental to the contract (including any dispute or difference regarding the interpretation of the contract or the termination thereof, or resulting from a termination thereof), shall be referred to arbitration by a Sole Arbitrator appointed by the General Manager. The provisions of the Arbitration & Conciliation Act, 1996 and all statutory re-enactments and modifications thereof and the Rules made thereunder shall apply to all such arbitrations. The venue of the arbitration shall be New Delhi (India)."
(Emphasis Supplied)
15. The petitioner invoked the Arbitration Agreement vide its notice dated 15.01.2016, requesting as under:-
"We, therefore, in terms of Arbitration Clause request you to nominate a person to act as an Arbitrator. Please ensure that names being proposed meet the requirement of independence and impartiality as envisaged in the Arbitration and Conciliation (Amendment) Ordinance, 2015."
16. On the above request, the respondent appointed the learned Arbitrator vide letter dated 15.02.2016.
17. Relying upon its earlier judgment in TRF Limited (supra), the Supreme Court in Perkins Eastman Architects DPC (supra) has held that the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a Sole Arbitrator. A party to the Agreement, therefore, would be disentitled to make any appointment of an Arbitrator.
18. In Bharat Broadband Network Limited (supra), the Supreme Court held that Section 12(5) of the Act provides OMP (COMM) 2/2023 The Oxford School of Education Vs. Page 8 of 16 M/s Edu Smart Services Pvt. Ltd.
for de jure inability of an Arbitrator to Act as such. The only way in which this ineligibility can be removed is by fulfilling the conditions in the Proviso to Section 12(5) of the Act, 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. The "express agreement in writing" has reference to a person who is interdicted by the Seventh Schedule, but who is stated by the parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the Seventh Schedule. It was held that where the Arbitrator is unable to perform his function, being ineligible under Section 12(5) of the Act, the appointment of the Arbitrator itself was void.
19. In Govind Singh (supra), a Division Bench of this Court considering the above judgments held that even if the party does not raise an objection to the appointment of the Arbitrator and participates in the arbitral proceedings without raising any objection to the appointment of the Arbitrator, it is not a waiver of such party‟s right under Section 12(5) of the Act. It was further held that an Arbitral Award passed by an Arbitrator who is ineligible to act as an Arbitrator cannot be considered as an Arbitral Award at all. The ineligibility of an Arbitrator goes to the root of his jurisdiction and the Arbitral Award cannot be considered as valid.
20. In MS Bridge Building Construction Co. Pvt. Ltd. (supra), a learned Single Judge of this Court, relying upon the above judgments, rejected the plea of the respondent therein that the petitioner therein having filed applications for extension of the mandate of the Arbitrator is deemed to have waived the applicability of Section 12(5) of the Act and cannot assail the Award on that ground.
21. In JMC Projects (India) Ltd. (supra), another learned Single Judge of this Court again rejected the plea of the respondent observing that the filing of applications for extension of time for continuance and completion of the arbitral proceedings, or applications to the Arbitrator for extension of time to file the affidavit of evidence etc., cannot constitute an "agreement in writing" within the manner of the Proviso to Section 12(5) of the Act.
22. In view of the above authorities, there can be no doubt that the learned Arbitrator appointed by the respondent was de jure ineligible to act as such. The petitioner by its participation in the arbitration proceedings or by its filing OMP (COMM) 2/2023 The Oxford School of Education Vs. Page 9 of 16 M/s Edu Smart Services Pvt. Ltd.
of applications under Section 29A of the Act seeking extension of the mandate of the learned Arbitrator, cannot be said to have waived the ineligibility of the learned Arbitrator under Section 12(5) of the Act, and, therefore, the Arbitral Award passed by the learned Arbitrator is invalid.
23. The only question, therefore, left to be considered by this Court is whether the petitioner can now be allowed to agitate the above ground by way of an amendment application, which admittedly has been filed much beyond the period prescribed in Section 34(3) of the Act.
24. In Hindustan Construction Company Limited (supra), the Supreme Court has held that the effect of Section 34(3) of the Act is not to completely rule out any amendment being allowed to be made in the application for seeking setting aside of the Award howsoever material or relevant it may be. The Court held as under:-
"29. There is no doubt that the application for setting aside an arbitral award under Section 34 of the 1996 Act has to be made within the time prescribed under sub-section (3) i.e. within three months and a further period of thirty days on sufficient cause being shown and not thereafter. Whether incorporation of additional grounds by way of amendment in the application under Section 34 tantamounts to filing a fresh application in all situations and circumstances. If that were to be treated so, it would follow that no amendment in the application for setting aside the award howsoever material or relevant it may be for consideration by the court can be added nor existing ground amended after the prescribed period of limitation has expired although the application for setting aside the arbitral award has been made in time. This is not and could not have been the intention of the legislature while enacting Section 34.
30. More so, Section 34(2)(b) enables the court to set aside the arbitral award if it finds that the subject-matter of the dispute is not capable of settlement by arbitration under the law for the time being in force or the arbitral award is in conflict with the public policy of India. The words in clause
(b) "the court finds that" do enable the court, where the application under Section 34 has been made within prescribed time, to grant leave to amend such application if the very peculiar circumstances of the OMP (COMM) 2/2023 The Oxford School of Education Vs. Page 10 of 16 M/s Edu Smart Services Pvt. Ltd.
case so warrant and it is so required in the interest of justice."
25. In Lion Engineering Consultants (supra), the Supreme Court held that even without an amendment in the petition, a plea of lack of jurisdiction of the Arbitrator can be raised even though no such objection was raised under Section 16 of the Act.
26. In Hindustan Zinc Limited (HZL) (supra), the Court held that if there is an inherent lack of jurisdiction of the Arbitrator, the plea can be taken up any stage and also in collateral proceedings. Such plea can be taken even where the party has consented to the appointment of the Arbitrator.
27. Applying the above principles to the facts of the present case, the plea of the Arbitrator being de jure ineligible to act as such is a plea of lack of jurisdiction. This plea can be allowed to be raised by way of an amendment and even without the same.
28. In Friends and Friends Shipping Pvt. Ltd. (supra), relied upon by the learned counsel for the respondent, the grounds that were sought to be added by way of an amendment were on the challenge to the neutrality of the Arbitrator. A ground to demonstrate fraud was also sought to be inserted. The Court, in fact, distinguished the judgment of the Supreme Court in Ellora Paper Mills Limited v. State of Madhya Pradesh, (2022) 3 SCC 1, by observing as under:-
"8. At the outset it is necessary to bear in mind that by way of the proposed amendment the grounds which are now being sought to be inserted have absolutely no foundation in the petitioner's application preferred under Section 34 of the Arbitration Act. As has been rightly noticed by the learned District Judge at no point of time any objection about neutrality of the Arbitrator was raised by resorting to Section 12, 13 or 15 of the Arbitration Act. This needs to be emphasized for the sole reason to ascertain as to if, the proposed amendment merely intends to add some facts to the pending challenge to the award or is it that it is intended to put forth absolutely new challenge xxxxx
10. True it is that in the matter of Ellora Paper Mills Limited (supra), the Section 12(5) which is inserted in the year 2015 has been held to govern a pending arbitration proceeding. However, it is to be borne in OMP (COMM) 2/2023 The Oxford School of Education Vs. Page 11 of 16 M/s Edu Smart Services Pvt. Ltd.
mind that it was a proceeding which was initiated under Sections 11, 14 and 15 and although the Arbitral Tribunal was constituted many years ago it had never commenced its proceeding. This is not the fact situation in the matter in hand. In this matter, without raising any objection at any earlier point of time on account of neutrality of the arbitrator by resorting to Sections 12, 13 and 14, an award has been passed and even it has been put to execution. Therefore, the petitioner is not entitled to derive any benefit from the decision in the matter of Ellora Paper Mills Limited (supra) as well."
29. The above judgment would, therefore, not come to the aid of the respondent, as in the present case, the objection on the learned Arbitrator is under Section 12(5) of the Act and of him being de jure ineligible to act as an Arbitrator.
30. In view of the above, it has to be held that the learned Arbitrator was de jure ineligible to act as such and the Award passed by the learned Arbitrator is void and unenforceable. The same is, therefore, set aside.
13. The award passed by the arbitrator who is unilaterally appointed is void ab initio and also unenforceable and unexecutable. Hon'ble Delhi High Court in case title 'Kotak Mahindra Bank Ltd. Vs. Narendra Kumar Prajapat, Neutral Citation Number : 2023:DHC:3705-DB, EFA(COMM) 3/2023, dt. 17.05.2023' held as under:
"..5. In the present case, the learned Commercial Court had found that the arbitrator appointed by the claimant (DH Finance Company) was ineligible to be appointed as an arbitrator by virtue of Section 12(5) of the A&C Act as interpreted by the Supreme Court in the aforementioned decisions.
6. The learned counsel appearing for the appellant does not seriously dispute that the arbitrator unilaterally appointed by the claimant was ineligible to be appointed as an arbitrator by virtue of Section 12(5) of the Act. He has largely focused his contentions on OMP (COMM) 2/2023 The Oxford School of Education Vs. Page 12 of 16 M/s Edu Smart Services Pvt. Ltd.
assailing the decision of the learned Commercial Court to award costs. It was also contended that the respondent was aware of the appointment of the arbitrator and had not raised any objection to such appointment; therefore the respondent is now precluded from challenging the impugned award.
7. We find little merit in the aforesaid contentions. The proviso to Section 12(5) of the A&C Act is unambiguous. A party can waive its right to object to the ineligibility of an arbitrator under Section 12(5) of the A&C Act but the same is subject to two conditions. First, that the waiver is required to be by and done by an express agreement in writing; and second, that such agreement is entered into after the disputes have arisen. Unless both the aforesaid conditions are satisfied, there can be no waiver of the ineligibility of an arbitrator.
8. In Bharat Broadband Network Limited v. United Telecoms Limited: (2019) 5 SCC 755, the Supreme Court had authoritatively held that waiver of a right to object to ineligibility of an arbitrator under Section 12(5) of the A&C Act cannot be inferred by conduct of a party. Such waiver can only be by an express agreement in writing. The Court had also clarified that "the expression 'express agreement in writing' refers to an agreement made in words as opposed to an agreement which is to be inferred by conduct".
9. In view of the above, the failure, if any, on the part of the respondent to object to the unilateral appointment of the sole arbitrator, cannot be construed as waiver of his right under Section 12(5) of the A&C Act.
The award rendered by an arbitrator who is ineligible to be appointed as such cannot be enforced.
11. In HRD Corporation v. GAIL (India) Ltd.: (2018) 12 SCC 471, the Supreme Court held as under:
"Since ineligibility goes to the root of the appointment, Section 12(5) read with the Seventh Schedule makes it clear that if the arbitrator falls in any one of the categories specified in the Seventh Schedule, he becomes "ineligible" to act as arbitrator. Once he becomes ineligible, it is clear that, under Section 14(1)(a), he then becomes de jure unable to perform his functions inasmuch as, in law, he is regarded as "ineligible". In order to determine whether an arbitrator is de jure unable to OMP (COMM) 2/2023 The Oxford School of Education Vs. Page 13 of 16 M/s Edu Smart Services Pvt. Ltd.
perform his functions, it is not necessary to go to the Arbitral Tribunal under Section 13. Since such a person would lack inherent jurisdiction to proceed any further, an application may be filed under Section 14(2) to the Court to decide on the termination of his/her mandate on this ground."
[emphasis added]
12. In Govind Singh v. M/S Satya Group Pvt Ltd & Anr.: 2023/DHC/000081 this court held as under:
"In view of the above, the remaining question to be addressed is whether an arbitral award rendered by a person who is ineligible to act as an arbitrator is valid or binding on the parties. Clearly, the answer must be in the negative. The arbitral award rendered by a person who is ineligible to act as an arbitrator cannot be considered as an arbitral award. The ineligibility of the arbitrator goes to the root of his jurisdiction. Plainly an arbitral award rendered by the arbitral tribunal which lacks the inherent jurisdiction cannot be considered as valid. In the aforesaid view, the impugned award is liable to be set aside as being wholly without jurisdiction."
13. The Learned Commercial Court has held that an award rendered by a person who is ineligible to act as an Arbitrator by virtue of the provisions of Section 12(5) of the A & C Act is a nullity and, therefore, cannot be enforced. It has accordingly dismissed the enforcement petition under Section 36 of the A&C Act with the cost quantified as ₹25,000/-.
14. This Court finds no infirmity with the aforesaid view. 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, by any authority, which lacks inherent jurisdiction to make such a decision, cannot be considered as valid. Thus, clearly, such an impugned award cannot be enforced.."
14. Following the precedent set in above cited judgments (Supra), this court finds the unilateral appointment of the arbitrator without the Petitioner's knowledge or consent renders OMP (COMM) 2/2023 The Oxford School of Education Vs. Page 14 of 16 M/s Edu Smart Services Pvt. Ltd.
the appointment invalid and in violation of the Act. Hon'ble Supreme Court as well as our own Hon'ble Delhi High Court, in the aforementioned cases, emphasized that an appointment process that excludes a party from participation undermines the very foundation of fair and impartial arbitration. By overlooking the Petitioner's involvement, the appointment process in this case falls short of the legal requirements and casts doubt on the arbitrator's impartiality.
15. The Petitioner's claim of being unaware of the arbitration proceedings raises concerns about a potential denial of natural justice, a fundamental legal concept guaranteeing a fair hearing. Section 21 of the Act requires providing notice invoking arbitration before initiating proceedings. This notice serves as a critical trigger, informing parties of the dispute and allowing them to prepare their defense.
16. Without such notice, the Petitioner was denied the opportunity to defend themselves and present their case. They couldn't respond to the allegations raised by Respondent No. 1 & 2, nor could they contest the evidence presented during the arbitration. This lack of awareness significantly prejudiced the Petitioner's ability to participate meaningfully in the proceedings, constituting a potential denial of natural justice.
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Conclusion
17. In conclusion, the judicial precedents cited above provide a strong legal basis for the Petitioner's arguments against the validity of the arbitral award. The unilateral appointment of the arbitrator and the ineligibility of the arbitrator under Section 12(5) of the Act are particularly significant issues that support the Petitioner's case. The entire arbitration proceedings are perverse and patently illegal. The arbitrator has been appointed in violation of Section 12 (5) of the Arbitration and Conciliation Act, 1996. Thus impugned award is non-est and void ab initio. The entire arbitration proceedings stand vitiated. Accordingly, the impugned award dated 03.02.2018 is set aside. Petition is allowed and disposed of accordingly. File be consigned to record room after due compliance.
Announced & dictated
in the open Court on
27th day of April, 2024 (NEELAM SINGH)
District Judge
(Commercial Court-02)
South-East, Saket Courts, ND
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