In O.M.P. (T) (COMM.) 92/2021-DEL HC- Unilateral appointment of sole arbitrator by party, who is interested in outcome of proceedings, cannot be sustained in law: Delhi HC 
Justice Mini Pushkarna [07-12-2022]

Read Order: ATELIER AUTOMOBILES PRIVATE LIMITED AND ORS v. M/S RELIGARE FINVEST LIMITED 

Mansimran Kaur

New Delhi, December 9, 2022:  Noting that independence and impartiality of an arbitrator are hallmarks of any arbitration proceedings, the Delhi High Court has terminated the mandate of the sole arbitrator unilaterally appointed by the respondent.

Justice Mini Pushkarna disposed of the present petition filed under Section 14 and 15 of Arbitration and Conciliation Act, 1996 seeking termination of the mandate of the sole arbitrator, unilaterally appointed by the respondent, by observing, “...it is clear that the unilateral appointment of the arbitrator by the respondent cannot be sustained in law.” 

The first petitioner was engaged in the business of dealership of Maruti Suzuki India Ltd. at Patiala and Saharanpur, and other petitioners were the directors of the first petitioner .  Respondent was a non-banking financial company. 

A loan agreement was executed between the parties. It was the case of the petitioner that the first petitioner regularly paid the installments towards repayment of loan. However, due to heavy floods in February, 2018, the first petitioner suffered huge losses on account of its stock worth crores of rupees getting damaged in the floods. Respondent subsequently sent a loan recall notice to the petitioners on October 14, 2019 and also invoked the arbitration clause by way of the said notice.  

Thereafter, respondent unilaterally appointed an arbitrator, without informing the petitioners or obtaining their consent. The sole arbitrator sent a notice to the petitioners directing them to appear before him in relation to the claim statement filed by the respondent.

It was the case of the petitioners that they came to know about the appointment of the sole arbitrator for the first time only on receipt of the said notice. Thus, petitioners immediately sent a letter to the arbitrator stating that his appointment had been made unilaterally by the respondent without prior notice to the petitioners, without obtaining their consent and was ex-facie illegal and contrary to the law laid down by Apex Court.

However, despite the aforesaid letter, the arbitrator proceeded and fixed dates for hearing and sent a letter to the petitioners asking them to appear before him. Thus, the present petition had been filed for termination of the mandate of the sole arbitrator.

After hearing the submissions, from both the side, the Court noted that as per Clause 21 of the said agreement, disputes between the parties had to be resolved through arbitration, to be referred to a sole arbitrator, who was to be appointed by the respondent.

Noticing that it has been held time and again by the Supreme Court that unilateral appointment of arbitrator by an authority which is interested in the outcome or decision of the dispute is impermissible in law, the Bench said, “In the present case, appointment of the arbitrator having been made unilaterally by the respondent, who is fully interested in the outcome or decision of dispute, thus, is not sustainable.”

 As per settled law, fairness, transparency and impartiality are virtues which are important for effective adjudication of a dispute through arbitration. Applying the yardstick, if the appointing authority of an arbitrator is a head or an employee of a party to the agreement including a company, then its interest in the outcome of the arbitral proceedings is a fact that cannot be denied, the Bench held.

In the present case, the Bench opined that the arbitration clause entitles the respondent to appoint a sole arbitrator and the respondent has full interest in the outcome of the arbitral proceedings. Thus, the unilateral appointment of sole arbitrator by the respondent, who is interested in the outcome of the proceedings, cannot be sustained in law, the Court further stated. 

Referring to the judgment in M/s Omcon Infrastructure Pvt. Ltd. Vs India Bulls Investment Advisors Ltd, the Court noted that the unilateral appointment of the arbitrator by the respondent cannot be sustained in law.  Accordingly, the arbitrator as appointed unilaterally by the respondent was declared ineligible to act as an arbitrator. 

It is not necessary for a party to make a challenge under Section 13 of the Act, the Court noted. “A petition for terminating the mandate of an arbitrator who is ineligible under Section 12(5) of the Act and for appointment of a substitute arbitrator, would be maintainable”, the Court further remarked. 

Thus, terminating the mandate of the sole arbitrator unilaterally appointed by the respondent, the Bench appointed a former Judge of the High Cour as the sole arbitrator to adjudicate the disputes that had arisen between the parties.