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Whether illegality of appointment procedure is fatal to the entire Arbitration Proceedings?

Article by Neelambika Singh & Ankita Sinha

Under the Arbitration & Conciliation Act, 1996 (“Act”) – the procedure for appointment of arbitrator is provided under Section 11 of the Act. However, the procedure for appointment of arbitrator is not limited by the Section, in fact, under Sections 7 and 10 of the Act, the parties are at complete liberty to set out the manner in which they will appoint the arbitrator. In fact, the parties determine the number of arbitrators, as to whether the arbitration will be an institutional arbitration etc, at the time of entering into the arbitration agreement.

The Act in providing the parties full autonomy w.r.t the appointment of Arbitrators and constitution of an Arbitral Tribunal to adjudicate on the inter-se disputes, aimed for paving the way for commencement of the proceedings, however, the said objective has often been met with resistance in situations where a party is questioning the validity or enforceability of the ‘Arbitration Agreement’ itself. Many of such instances have arisen before the courts in India, where parties have argued that the matter was not to be referred to an arbitration at all.

In the present Article, by way of the recent judgments of the Hon’ble High Courts of Delhi and Bombay, the authors have attempted to explore– as to whether the illegality of appointment procedure is fatal to the entire Arbitration Proceedings.

In a recent judgment dated 04 May 2023 of Hon’ble Bombay High Court in the matter of Sunil Kumar Jindal v. Union of India, 2023 SCC OnLine Bom 1691, the bone of contention was regarding clause 13 -A (b) and clause 25 (ii) of the agreement between the Applicants and Respondent, which provided that it is a term of the contract that no person other than the person appointed by the competent authority of CII/CMD of subsidiary company should act as an arbitrator, and that if for any reason that is not possible, the matter is not to be referred to arbitration at all.

However, the Hon’ble Bombay High Court referred to the Hon’ble Apex Court’s Judgments in Jagdish Chander v. Ramesh Chander, (2007) 5 SCC 719 and Babanrao Rajaram Pund v. Samarth Builders & Developers, (2022) 9 SCC 691 and found that if the Arbitration clause in question discloses the intention and obligation of the parties to be bound by the decision of the Arbitral Tribunal, it can be gleaned from other parts of the arbitration agreement that the intention of the parties was surely to refer the disputes to arbitration.

In the face of conflicting positions taken by the parties, the Hon’ble High Court held that once the non-applicants had agreed for resolution of the dispute, by way of an arbitration, as a dispute resolution mechanism between them. They cannot be permitted, to wriggle out of the same on the plea that the clause required arbitration by certain officer of the non-applicant or not at all, as it will have to be held that the entire clause, in that regard, was capable of being severed in furtherance of the intention to arbitrate as specifically spelt out from clause 13-A and clause 25 (ii), as all the essential elements which constitute a binding arbitration agreement, between the parties, were satisfied by the above referred clauses.

The said interpretation to enable Arbitration Proceedings between parties has also been upheld by the Hon’ble High Court of Delhi in its decision dated 01 December 2023 in the matter of S K Engineering and Construction Company India v. Bharat Heavy Electrical Ltd., where, in the context of a Contract between the Petitioner and the Respondent for work relating to “Execution and Handing Over of Civil Works for Land Development and Boundary work for 400/110 KV Switchyard at Thappagundu in Tamil Nadu”; disputes had arisen between the parties in reference to Clause 26.0 of the Contract, which provided that “no person other than a person appointed by such Head TBG as aforesaid should act as arbitrator and if for any reason that is not possible the matter is not to be referred to arbitration at all”.

Hence, it was the argument of the non-agreeable party that the parties have agreed to a conditional arbitration clause and that on occurrence of the contingency mentioned in the arbitration clause there is a withdrawal of consent to arbitration and therefore, there was no valid arbitration agreement in terms of Section 7 of the Act.

The petitioner’s relied on the Hon’ble Supreme Court’s judgment in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd., (2020) 20 SCC 760 argued that it is impermissible for the respondent to unilaterally appoint an arbitrator and that an independent sole arbitrator is liable to be appointed. It was further argued that the intention of the parties to refer their disputes to arbitration is manifest from the arbitration clause and procedure for appointment of an arbitrator being contrary to law should be excised therefrom.

In line with the findings of the Hon’ble Supreme Court and more recently, the Hon’ble Bombay High Court, the Hon’ble High Court of Delhi rightfully rejected the contentions of the Respondent. The Court reasoned that, just because the procedure for appointment of an arbitrator has been rendered invalid or unenforceable by technical reasons, it would not imply that the entire arbitration clause is rendered invalid or void. It was held that the procedure for appointment of an arbitrator is clearly distinct and separable from the agreement to refer disputes to arbitration, even if these are contained in the same arbitration clause.

Therefore, to answer the question, it is safe to conclude that the law is well settled that a commercial document having an arbitration clause must be interpreted in such a manner so as to give effect to the agreement rather than invalidate it. While construing an arbitration agreement, the Courts must lean in favour of giving effect to the arbitration agreement between the parties. This conclusion is in line with the intension of the legislature as the Act itself severely limits the scope of judicial interference and gives paramount importance to the intension and autonomy of the parties in such matters.