Arbitral Award passed by Unilaterally Appointed Arbitrator cannot be Challenged later if Previously Uncontested - Delhi High Court
Introduction
The Delhi High Court, in the case of Arjun Mall Retail Holdings Pvt Ltd v. Gunocen Inc [FAO (COMM) 31/2021 & CM APPL. 5051/2021] [Arjun Mall Case], held that if any party fails to challenge the unilateral appointment of the arbitrator(s) at an earlier stage, then such party cannot challenge the arbitral award passed by such arbitrator(s) [who are unilaterally appointed].
The bench comprising Justices Suresh Kumar Kait and Neena Bansal Krishna dealt with the appeal, challenging the order passed by the Commercial Court, Delhi whereby the objections filed by the appellant under Section 34 of the Arbitration and Conciliation Act, 1996 [the Act] against the Arbitral Award were dismissed.
While the Perkins Eastman Architects Dpc vs Hscc (India) Limited, [2019] [Perkins case] established the rule of prohibition on the unilateral appointment of arbitrators, the Arjun Mall case introduces an exception to this rule by imposing a time limit within which challenges to such unilateral appointments can be raised. The case emphasizes on the importance of parties raising objections to the appointment of arbitrators in a timely manner during the arbitration proceedings. By not contesting the arbitrator’s appointment early in the process, a party might be viewed as having waived their right to challenge the appointment later. The case encourages parties to promptly raise objections to procedural irregularities to maintain the fairness and efficiency of the arbitration process.
Facts
The parties entered into a Memorandum of Understanding (MoU) on January 24, 2015, which included an arbitration clause containing a provision for the unilateral appointment of arbitrator. When a dispute arose, the respondent initiated arbitration proceedings by a notice dated November 11, 2017, and unilaterally appointed an arbitrator. The arbitrator proceeded with the reference and issued notices, and the respondent submitted its claim. However, the appellants objected to the arbitrator’s appointment and refused to participate. The arbitrator, in response to the objection, continued with the proceedings ex-parte and issued an award on February 5, 2019, favoring the respondent.
The appellants, before the Commercial Court, challenged the award under Section 34 of the Act asserting that the unilateral appointment of the arbitrator rendered the tribunal invalid. They also raised concerns about the alleged forgery of the MoU and its insufficiency in stamp duty. The Commercial Court rejected the challenge, prompting the appellants to appeal under Section 37 of the Act.
The respondent countered by stating that the appellants were habitual defaulters, engaged in document fabrication, and faced various civil and criminal cases. Additionally, they argued that the appellants ignored several demand notices, and the arbitrator relied on compelling evidence to issue the award.
Judgement
The High Court noted that Clause 13.7 of the MoU permitted the unilateral appointment of the arbitrator by the respondent. Despite the appellants’ objection to the arbitrator’s appointment, they failed to challenge it at an earlier stage. The Court also highlighted the respondent’s demand notices and the eight-month delay between the arbitrator’s appointment and the commencement of proceedings.
The High Court concluded that a party cannot challenge an arbitral award based on the arbitrator’s unilateral appointment if the challenge was not raised earlier. It emphasized that the appellants should have contested the appointment either through Section 11(6) or Sections 13 and 14 of the Act. Consequently, the Court dismissed the challenge and upheld the award.
The appellants argued that the respondent did not file an application with the court for the appointment of an arbitrator under Section 34 the Arbitration and Conciliation Act, 1996, despite objections raised by the former party. The High Court stated, “under Section 34 of the Act, 1996 scope of interference by the Court is limited to the extent that the Arbitral Award is not vitiated on basis of pleadings raised by the parties.”
It was further noted that the respondent sent multiple notices invoking the arbitration clause. The appellants were officially notified about the initiation of arbitration proceedings and the arbitrator’s appointment through a legal notice, marking the commencement of proceedings on the same date. During the hearings, the appellants did not appear before the arbitrator. Despite nearly eight months passing since the first notice, the appellants took no legal action to challenge the arbitrator’s appointment or dispute the validity of the arbitration clause.
Therefore, the High Court agreed with the District Judge’s decision that if a party fails to raise a plea in arbitral proceedings, it cannot later seek relief before the Appellate Authority, and such a plea deserves rejection.
The High Court referred to the case of Delhi Airport Metro Express (P) Ltd. v. Delhi Metro Rail Corporation Ltd.[2022], emphasizing that interference with an award under Section 34 on the grounds of patent illegality is permissible only when the arbitrator takes an impossible view, interprets a clause in the contract in an unreasonable manner, or commits a jurisdictional error. An arbitrator’s award with no reasons for its findings could be susceptible to challenge on this basis. The conclusions of the arbitrator, based on no evidence or arrived at by ignoring relevant facts, may also be subject to challenge.
Conclusion
The Arjun Mall Case underscores the critical importance of parties promptly raising objections to procedural irregularities during arbitration proceedings. Failure to challenge the unilateral appointment of arbitrators at an earlier stage may result in the forfeiture of the right to challenge the arbitral award. The Court’s decision introduces a noteworthy addition to the rule established in the Perkins case.
The case provides a nuanced understanding of the legal implications surrounding unilateral appointment of arbitrators and challenges to arbitral awards. It reinforces the principle of timely objection during arbitration proceedings and highlights the consequences of failing to adhere to this principle, thereby contributing significantly to the jurisprudence on arbitration in India.
