INTRODUCTION
The Calcutta High Court has criticized and disapproved the practice of banking and financial companies appointing an arbitrator unilaterally without involving the other party in the latest Judgment in Cholamandalam Investment & Finance Company Ltd v. Amrapali Enterprises [Hereinafter Cholamandalam case]. The court refused to recognize and enforce an award passed by an arbitrator who was appointed unilaterally by the Cholamandalam. The court held that such unilateral appointments of an arbitrator are unlawful and against the principles of impartiality and independence fundamental to arbitration. The court held that parties must appoint an independent and impartial arbitrator to resolve disputes and cannot unilaterally appoint an arbitrator without consulting the other party.
In the Cholamandalam case, there was a loan cum Hypothecation agreement, the parties agreed that the Cholamandalam Investment & Finance Company Ltd [Hereinafter Cholamandalam] would provide financial assistance to the Amrapali Enterprises [Hereinafter Amrapali] for the purchase of a vehicle. However, a dispute arose between them and Cholamandalam unilaterally appointed the arbitrator. Amrapali did not participate in the arbitration proceedings and the arbitrator delivered an award in favour of the Cholamandalam. The award was challenged under Section 34 of the Arbitration and Conciliation Act, 1996 [Hereinafter A&C act] but the Court opined that the challenge may be time-barred. Subsequently, Cholamandalam sought to enforce the award under Section 36 of the A&C Act. However, the Amrapali opposed the enforcement of the award, arguing that the appointment of the arbitrator was illegal, rendering the arbitral proceedings and resulting award also illegal and unenforceable under the law.
ANALYSIS
This judgement tries to find a solution to the issue not only from the perspective of fairness but also from the foundation of law.
The Hon’ble Supreme Court in the case of HRD Corporation v. GAIL, it was held that if a person falls directly under Schedule VII, their ineligibility goes to the very foundation of their appointment due to the prohibition under Section 12(5) read with Schedule VII, rendering them devoid of inherent jurisdiction.
In TRF Ltd v. Energo Engineering Projects and Perkins Eastman v. HSCC, both decided by the Supreme Court of India, to support its conclusion that an individual who is not eligible to be appointed as an arbitrator cannot unilaterally appoint another person as the sole arbitrator. This means that if a person is not qualified to be an arbitrator under the law, they cannot appoint someone else to act as an arbitrator on their behalf.
The apex court in BBNL v. United Telecoms held that, to hold that any waiver of the ineligibility of an arbitrator under Section 12(5) of the A&C Act must be made through an express agreement. In other words, any agreement to waive the ineligibility of an arbitrator must be clearly stated and agreed upon by both parties involved in the arbitration process.
These cases demonstrate that the appointment of an arbitrator must be made in accordance with the rules set out in the law and that any attempts to appoint an ineligible person as an arbitrator, either directly or indirectly, are not valid.
The Calcutta High Court’s reliance on these cases shows that it takes seriously the requirement for independence and impartiality of arbitrators in the arbitration process.
The Calcutta High Court stated that the arbitrator was appointed unilaterally by the Cholamandalam, which was an illegal act. Consequently, the court considered the entire arbitration proceedings and the award resulting from them void ab initio. The court held that an award passed by a unilaterally appointed arbitrator is inherently biased and prejudiced, and this cannot be remedied at any stage of the proceedings.
The court expressed its disapproval of the practice of banking and financial institutions unilaterally appointing arbitrators. As a result, it refused to enforce an award that was passed by an arbitrator unilaterally appointed by the award holder.
The court stated that an award passed by a unilaterally appointed arbitrator is non-est. Its enforcement will be refused under Section 36 of the A&C Act even if the award is not set aside under Section 34. The court added that the executing court can declare a “unilateral appointment award” non-est in law, nullify it, and direct the parties to re-agitate their dispute before an independent and impartial arbitral tribunal.
The court emphasized that the independence and impartiality of an arbitrator are fundamental principles of arbitration that must be protected at all stages, including the execution stage. The court noted that justice cannot be served if a “unilateral appointment award” is allowed to be enforced.
In light of these findings, the court refused to enforce the award and ordered the parties to re-agitate their claims before a new and impartial arbitral tribunal. The court appointed an independent arbitrator for the parties and directed the arbitrator to disclose any potential conflicts of interest in accordance with Section 12(1) of the A&C Act.
CONCLUSION
In conclusion, the High Court of Calcutta has made a significant pronouncement on the practice of banking and financial institutions unilaterally appointing arbitrators. The court has deprecated this practice and refused to enforce an award that was passed by a unilaterally appointed arbitrator. The court has held that an arbitration award passed by a unilaterally appointed arbitrator is non-est and its enforcement would be refused under Section 36 of the A&C Act, even if the award was not set aside under Section 34. The court has emphasized the importance of the independence and impartiality of arbitrators and held that this hallmark of arbitration must be safeguarded by the courts at all stages of arbitration, including the execution stage. The court has directed the parties to re-agitate their claims before an independent and impartial arbitral tribunal and appointed an independent arbitrator for the parties. This judgment will have significant implications for the practice of unilateral appointments of arbitrators and will help ensure fairness and impartiality in the arbitration process.
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