The Kerala High Court on Tuesday held that after the 2015 amendment to the Arbitration and Conciliation Act of 1996, a sole arbitrator can be appointed only by a written agreement between the parties or by an order of the High Court [M/s Hedge Finance Pvt. Ltd. v Bijish Joseph]

Justice CS Dias analysed the amended provisions of the Act and various precedents of the Supreme Court and arrived at the conclusion that there are two modes of appointing a sole arbitrator in order to ensure neutrality for the arbitration as well as the arbitration selection process.

".. it is abundantly clear that the law mandates that there should be neutrality not only for the Arbitrator but also in the arbitrator selection process as well. Thus, in the post-2015 amendment era, there are only two modes of appointment of a sole Arbitrator:

(i) by express agreement in writing between the parties, post the dispute, agreeing to waive the applicability of Section 12 of the Act or,

(ii) by order of appointment by the High Court under Section 11 of the Act," the judgment said.

The Court said that if the appointment of a sole arbitrator is made other than by the above two methods, the appointment would be ex facie bad and in contravention of the provisions of the Act.

In such cases, the arbitrator would become de jure ineligible to act as an arbitrator by the operation of law, the Court added.

The Court further held that an interim award passed by an arbitrator appointed in contravention to the provisions of the Act is unenforceable in law.

"Thus, I have no doubt in my mind that an interim award passed by an arbitrator who was appointed in contravention of the provisions of the Act and the law laid down by the Honourable Supreme Court extracted above, is bad in law and as a corollary to the same, the award is unenforceable. ...As observed in TRF Ltd v Energo Engineering Projects Ltd, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Therefore, the interim award becomes worthless," the Court said in its judgment.

The petition was moved by a Non Banking Finance Company, from whom the respondent had availed a loan for purchasing a vehicle. The two parties entered into a hypothecation agreement which contained an arbitration clause.

When the respondent committed a breach of the agreement, the petitioner invoked the relevant clause of the agreement and issued a notice under Section 21 of the Act by suggesting the name of an arbitrator.

Since the respondent did not respond even after receiving the notice, the petitioner assumed that the arbitrator suggested was acceptable and proceeded to appoint a sole arbitrator.

The arbitrator passed an interim award permitting the petitioner to repossess the vehicle of the respondent following which the petitioner moved an application under section 17(2) of the Act to enforce the interim award.

However, the Additional District Judge, upon finding that the respondent resided in Kottayam district, held that it has no jurisdiction and ordered the return of the original petition for representation to the proper court.

This order was assailed by the petitioner before the High Court.

Advocate Shiju Varghese, representing the petitioner, argued that there is no necessity under the Act to file the original petition at the place where the respondent is residing.

Reliance was placed on the decision of the Supreme Court in Sundaram Finance Ltd. v Abdul Smad & Anr., as well as the decision of the Kerala High Court in Muthoot Vehicle and Asset Finance Ltd. v Gopalan Kuttappan to canvass the position that an award can be enforced anywhere in India and the property can be attached before judgment by a court even if the subject matter is outside its jurisdiction.

At this stage, the Court noted that several precedents of the Supreme Court have held that post-2015 amendment of the Act, a unilateral appointment of an arbitrator by an authority which is interested in the outcome of the dispute is impermissible in law.

Taking into account the complexity of the issue, i.e., the petitioner wanting to enforce an interim award passed by a person who is prima facie found ineligible to act as an arbitrator, the court appointed advocates Liji Vadakedom and Ranjith Varghese as amici curiae to assist the court.

The amici curiae, referred to precedents on the topic and submitted, in unison, that after 2015, a person falling foul of schedules V and VII of the Act is ineligible to be appointed or act as an arbitrator unless, after the dispute, the parties enter into an express agreement in writing, as stipulated under the proviso to section 12(5) of the Act, or the arbitrator is appointed by the High Court under section 11 of the Act.

It was also asserted that when an interim award passed under section 17(1) is sought to be enforced through court under section 17(2), there is no necessity to dispense with notice to the respondent.

The Court accepted the arguments on both the points made by the amici curiae.

Since the district court seemed to not have gone into the above aspects, the High Court set aside its order and directed it to reconsider the plea in light of the precedents mentioned in the High Court judgment.

The Court also directed the Registrar (District Judiciary) to forward the judgment to all competent courts in the State which deal with applications filed under the Arbitration Act.

[Read Judgment]