Arbitrator Ineligibility Under S.12(5) ACA Waived By Express Agreement And Conduct Post-Dispute: Bombay High Court - 2025-04-24

Bombay High Court Upholds Arbitral Award, Finds Waiver of Arbitrator Ineligibility Under Section 12(5) ACA

Mumbai: In a significant ruling on arbitrator eligibility and waiver under the Arbitration and Conciliation Act, 1996 (ACA), the Bombay High Court has set aside an order of the Commercial Court at Thane which had quashed an arbitral award solely on the ground that the arbitrator was ineligible under Section 12(5) read with the Seventh Schedule of the Act.

A division bench of Justices G. S. Kulkarni and Advait M. Sethna held that the parties had, by express agreement in writing and by their conduct subsequent to the disputes arising, waived the applicability of Section 12(5). The court emphasized the principle of party autonomy and minimum judicial intervention in arbitration proceedings where parties have consented to an arbitrator's appointment.

Case Background

The dispute arose from a water supply works contract awarded by M/s. STEM Water Distribution and Infrastructure Com. Pvt. Ltd. (Respondent, original respondent) to Mr. R. B. Krishnani (Appellant, original claimant) in 2013. The contract included an arbitration clause (Clause 17b) stating that the "Member Secretary STEM (Respondent)" would be the sole arbitrator.

Following disputes over extra work, the appellant invoked arbitration in 2019. Crucially, the respondent, through an affidavit filed in a Section 11 petition and a subsequent advocate's letter dated July 22, 2019, expressly proposed and agreed to the appointment of Col. Vivekanand Choudhary (retd.), the then Managing Director of the respondent company, as the sole arbitrator, identifying him as the person designated under the arbitration clause.

The appellant accepted this appointment without raising any objection regarding the arbitrator's relationship with the respondent. The sole arbitrator entered reference, made disclosures under the Fifth Schedule, and conducted proceedings with the active participation of both parties, including filing pleadings and agreeing on the schedule. Significantly, the respondent also participated in proceedings before the High Court under Section 29A of the ACA seeking an extension of the arbitrator's mandate, which was granted.

The arbitrator rendered an award on September 29, 2020. The respondent challenged the award under Section 34 of the ACA before the Commercial Court, primarily arguing that the arbitrator, being the Managing Director of the respondent, was ineligible under Section 12(5) read with the Seventh Schedule of the ACA. The Commercial Court accepted this argument, finding that there was no express agreement in writing to waive the ineligibility under the proviso to Section 12(5), and set aside the award.

Arguments Presented

The Appellant contended: * The respondent's letter dated July 22, 2019, and the affidavit clearly constituted an "express agreement in writing" to waive the applicability of Section 12(5), falling squarely within the proviso to the section. * The respondent actively insisted upon and accepted the appointment of the Managing Director as the arbitrator and fully participated in the proceedings without objection to jurisdiction (under Section 16) or mandate termination (under Section 14). This amounted to a waiver under Section 4 of the ACA and the principle of estoppel. * The arbitrator did not lose his mandate merely because he retired as Managing Director during the proceedings, citing Supreme Court precedents. * The Commercial Court improperly allowed the respondent to introduce additional documents in the Section 34 proceedings which were not part of the arbitral record, contrary to established law.

The Respondent argued: * The arbitrator was ineligible under Section 12(5) due to his position as Managing Director. * There was no valid "express agreement in writing" to waive this ineligibility as required by the proviso to Section 12(5). * The appointment was allegedly not properly authorized by the respondent's Board of Directors (an internal matter). * The arbitrator himself had allegedly expressed unwillingness, and the respondent had, at one stage during arbitration, indicated loss of confidence (though this objection was raised late and no formal steps were taken).

High Court's Analysis and Decision

The High Court meticulously examined the facts and the applicable legal provisions, including Section 12(5) and its proviso, Section 4 (Waiver of right to object), Section 14 (Failure or impossibility to act), and Section 34 (Application for setting aside arbitral award) of the ACA.

The bench noted that the arbitration clause appointed the person designated as 'Member Secretary STEM'/'Managing Director'. More importantly, after the dispute arose, the respondent explicitly agreed and even insisted on the appointment of Col. Vivekanand Choudhary (retd.) as the sole arbitrator through written communications. The appellant accepted this.

Citing the Supreme Court's decision in Bharat Broadband Network Ltd. vs. Union Telecom Ltd. , the High Court reiterated that Section 12(5) renders a person in categories under the Seventh Schedule ineligible , but this ineligibility can be waived by an "express agreement in writing" subsequent to the dispute.

The Court found that the respondent's affidavit and advocate's letter constituted such an express agreement in writing. The respondent's conduct in actively participating in the arbitration, including the Section 29A proceedings for extension of mandate before the High Court without challenging the arbitrator's eligibility, fortified this conclusion.

The judgment relied on the principles laid down by the Supreme Court in Central Organisation for Railway Electrification vs. ECI SPIC SMO MCML (JV) , which clarified that the proviso to Section 12(5) secures "real and genuine party autonomy" allowing parties to waive the applicability of Section 12(5) by an express agreement after the dispute arises, consciously abandoning their legal right.

The High Court also referred to Himalayan Construction Co. vs. Executive Engineer, Irrigation, J&K and Laxmi Continental Construction Company vs. State of Uttar Pradesh & Anr. , holding that a designated arbitrator who has entered reference by consent does not lose their mandate or become disqualified merely upon ceasing to hold the designation (e.g., by retirement), especially in the absence of any such clause in the arbitration agreement.

Furthermore, the bench criticized the Commercial Court's decision to allow additional documents to be filed in the Section 34 proceedings, reaffirming the principle from Alpine Housing Development Corporation Pvt. Ltd. vs. Ashok S. Dhariwal & Ors. that Section 34 proceedings are summary in nature and generally restricted to the record before the arbitrator, with limited exceptions.

The Court concluded that the Commercial Court had failed to consider the clear facts demonstrating the respondent's waiver under both the proviso to Section 12(5) and Section 4 of the ACA, as well as the principles of acquiescence and estoppel.

Consequently, the Bombay High Court quashed and set aside the judgment and order of the Commercial Court, allowing the appeal. The arbitral award stands reinstated.

The ruling underscores the importance of raising objections regarding arbitrator eligibility promptly and highlights that active participation in arbitration proceedings, coupled with written consent post-dispute, can constitute a valid waiver of rights under Section 12(5) of the ACA.

Bench: Justices G. S. Kulkarni and Advait M. Sethna

Case Name: Mr. R. B. Krishnani vs. M/s. STEM Water Distribution and Infrastructure Com. Pvt. Ltd.

Case Number: COMMERCIAL ARBITRATION APPEAL NO. 8 OF 2023

Pronounced On: 21 April 2025