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By: Puneet Dhawan, Advocate

Arbitration is one of the peculiar ways of Alternate Dispute Resolution (ADR) which sheds off the Court burden. Not only this, but an Arbitration process also exhilarates efficacious disposition of the list rather than the Court procedure which is comparatively cumbersome. Nowadays, various companies and business conglomerates are emphasizing either adopting arbitration as an ADR in their main Business Agreement/Contract or as a separate ancillary to the main business contract/agreement.  By adhering to the Arbitration in the Contract, whether part of it or as a separate nomenclature, the parties to it are under a mandate to refer the same to the Arbitration proceedings rather than approaching the Court. As there is a stark rise in Arbitration as an ADR, the legislature, as well as the judiciary, are building up mechanisms to evolve the arbitration law that best suits the needs and rights of the parties without there being any kind of prejudice caused to them. 

However, during the last few months, there has been a stark development over the issue of transparency and equity in Arbitration law by our judicial setup. The Judges of the Court, being vigilant and proactive towards considering fairness and equity, have given due diligence to the appointment of the Arbitrators to dispense justice to the parties concerned in the arbitration proceedings. 

There have been quite a few cases in the past in which arbitrary orders have been passed by the arbitrators which roots to the very realm of the appointment of the arbitrator based on which the whole process, procedure, and result in the form of Award depends. 

Considering the same, the Judiciary has taken drastic measures to improvise the very appointment procedure of the Arbitrators adopted by the parties to list wherein they have built up a mechanism of equity and fair justice by considering rights of appointment of the arbitrator being given to both the parties concerned at the very initial stage of the list. 

In a very recent case of Rich and Royal Vs. Authorized Officer, Hinduja Leylord Finance Ltd. (MANU/GJ/1309/2023), the Court has evolved and emphasized on fair system of appointment of the Arbitrator. This case was about a Writ Petition filed under Article 226 of the Constitution of India in which the petitioners challenged the Awards passed by the Sole Arbitrator appointed by respondent no.1 i.e. Non-Banking Finance Company on the ground that the arbitration awards were passed ex parte by the Sole Arbitrator and Sole Arbitrator could not have been unilaterally appointed by the respondent no.1 as per the settled legal position.

In this case, the Hon’ble Justice Bhargav D. Karia of the Gujarat High Court at Ahmedabad, while considering the observation of the judgment passed in the case titled TRF Ltd. V. Energo Engg. Projects Ltd.: (2017) 8 SCC 377, has held that a person having an interest in a dispute or the outcome thereof is legally ineligible not only to act as an arbitrator but is also ineligible to appoint anyone else as an arbitrator. It is an admitted position in each of the petitions that the arbitration clause gave power and authority to the respondent Non-Banking Finance Company unilaterally to appoint the sole arbitrator and accordingly, the Sole Arbitrator was appointed unilaterally which is contrary to the decision of the Apex Court in the context of Section 12(5) of the Arbitration & Conciliation Act, 1996 read with Seventh Schedule thereof. The Hon’ble Court also analyzed considered and further observed that even though the petitioners are required to challenge the Arbitration Award under Section 34 of the Arbitration & Conciliation Act, 1996, the petitioners have been able to show exceptional circumstances and bad faith on the part of respondent Non-Banking Finance Company to invoke the remedy under Articles 226 and 227 of the Constitution of India whose ambit is broad and pervasive. The Court held that in exceptional circumstances, as emerging from the facts of the petitions, the petitions are entertained instead of relegating the petitioners to avail appropriate remedy under Section 34 of the Arbitration & Conciliation Act, 1996.

The Court has gone into the root cause of the very appointment of the Arbitrator and has held that whether the Managing Director, who after becoming ineligible by law, is otherwise eligible to be nominated as an Arbitrator. The findings of the Court concluded that the Managing Director was ineligible by operation of law i.e. he had an interest in the dispute or the outcome of the dispute. The Court had also observed that in a case where only one party has a right to nominate an arbitrator of his choice, it will always have an element of exclusivity in determining or charting the course for dispute resolution and hence would render injustice. 

The Court further observed that a person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator as there is surety of his/her being prejudiced in the matter affecting the fairness of the whole procedure followed by Award of the list. The Court gave their observations in consideration of the essence of the amendments brought in by the Arbitrator & Conciliation (Amendment) Act, 2015.