Understanding legality of unilateral appointment of Arbitrator: Mcleod Russell India Limited & Others vs Aditya Birla Finance Limited & Ors

Section 12 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) provides that the Arbitrator appointed to decide the dispute shall be impartial and independent, and irrespective of an agreement to the contrary, a person who falls under the categories specified under Seventh Schedule is ineligible to be appointed as an arbitrator. However, clause (5) also provides that parties can waive the applicability of this sub-section by an express agreement in writing.

In the Arbitration Act, the concept of illegality of the unilateral appointment of an Arbitrator as laid down by the Hon’ble Supreme Court in TRF Ltd. v. Energo Engineering Projects Ltd., Bharat Broadband Network Limited v. United Telecoms Limited, and upheld in Perkins Eastman Architects DPC v. HSCC (India) Limited is rooted in Section 12 read with the Fifth and Seventh Schedules.

Though the interpretation of the clause as laid down in the above-cited judgments leads to a conclusion that the unilateral appointment of an Arbitrator is illegal, clause (5) is an exception to the rule which dictates a circumstance under which a unilateral appointment can be held to be legal.

The proviso has recently been interpreted by the Hon’ble High Court of Calcutta in Mcleod Russell India Limited & Others vs. Aditya Birla Finance Limited & Others. In this case, the arbitration clause in the contract, as extracted herewith, granted the respondent a unilateral right to designate the arbitrator:

"Any dispute(s), difference(s), and/or claim(s) arising in connection with the transaction or as to the construction, meaning, or effect thereof in relation to any transaction document or as to the rights and liabilities of the parties under any transaction document shall be settled by arbitration in accordance with the Arbitration and Conciliation Act, 1996, or any statutory amendments, modifications, and/or replacements thereof and the rules framed thereunder, which shall be referred to a sole arbitrator to be appointed by the investor. The seat of the arbitration shall be India, and the venue of the arbitration shall be at such place as shall be determined by the investor at its sole discretion."

On May 11, 2019, the respondent appointed a sole arbitrator for the resolution of disputes. The arbitration proceedings were duly attended by the petitioners, and neither did they object to the unilateral appointment nor did they expressly agree in writing to waive the applicability, as provided under Section 12 (5). Later on, the petitioners challenged the appointment under Section 14 of the Arbitration Act.

The petitioners argued on the illegality of a unilateral appointment of the arbitrator from the onset, contending that the arbitrator lacks inherent jurisdiction and that the petitioner has not waived, expressly in writing, the applicability of Section 12. It was also argued by the petitioners that mere involvement in the proceedings would not qualify as a waiver in the sense that the proviso to Section 12(5) of the Act intended.

The respondents, on the other hand, argued that the petition was an afterthought and that the petitioners had expressly consented to the sole arbitrator in the manner provided for by Section 12(5) of the Act, given that the petitioners never disputed such an appointment and instead knowingly and voluntarily took part in the arbitration proceedings.

The respondents contended that, under these circumstances, the pleadings and affidavits submitted by the petitioners in the arbitration proceedings should be viewed as express consent to the appointment of the sole arbitrator under the proviso to Section 12(5) of the Act, thereby waiving the applicability of Section 12.

The Court drew an odd contrast between the circumstances of the current case and the rulings in TRF and Perkins.

The Court determined that in TRF and Perkins, the arbitration provision allowed for a persona designata arbiter, who had the authority to choose an arbitrator in his or her place or serve as the arbitrator.

The respondent, in the present case, however, lacked persona designata status and was ineligible to serve as the arbitrator. The respondent was only given the power to choose the sole arbitrator, and because the respondent chose an impartial third party, i.e., a retired judge of the Madhya Pradesh High Court as an Arbitrator, the Arbitrator did not fall under the prohibited relationships/categories mentioned in the Seventh Schedule.

The Court further took note of the parties’ full, complete and repeated participation in the Arbitration proceedings, despite being aware of the implications of the judgments in TRF, Bharat Broadband, and Perkins, and the waiver of perceived disqualification by the petitioners under Section 12 (5), as evident from the Minutes of Meeting dated 27.05.2019, wherein both parties agreed to the practice and procedure to be followed by the parties in the arbitration, the Statement of Defence, the consent order passed by the Arbitrator on the offer made by the petitioner itself, an application filed by the petitioner stating that the jurisdiction of the Arbitrator is limited to the dispute arisen on 11.05.2019, and various other pleadings.

The Court also noted the conduct of the petitioner in bombarding the Courts and the Tribunal with numerous applications/petitions under Section 13, Section 14, Section 34, and even an SLP before the Supreme Court. Lastly, the Court also discussed the scope of Section 14 being applicable only in the instances where the Arbitrator withdraws from his office or where the parties agree to terminate the mandate of the Arbitrator.

In view of the above, the Court held that Section 12 (5) is not applicable to the present case as the disqualification as alleged by the petitioners is not in breach or conflict with the Entries of the Seventh Schedule, and the Arbitrator appointed in the present case is impartial and independent. The Court also stated that even if it is assumed that the Arbitrator was ineligible, the same was waived by the petitioners by the express writings, conduct and agreement as laid down under Section 12 (5).

Amit Meharia is the Managing Partner, Abinash Agarwal is a Senior Associate and Poonam Kanwar Shekhawat is an Associate at MCO Legals.