Delhi High Court Sets Aside Arbitral Award Citing Invalid Unilateral Arbitrator Appointment Post-2015 Amendment and Procedural Misconduct

New Delhi: The Delhi High Court, in a significant ruling, has set aside an arbitral award, holding that the unilateral appointment of a substitute arbitrator by the Delhi Development Authority (DDA) after the 2015 amendment to the Arbitration and Conciliation Act, 1996 , was invalid, even though the original arbitration proceedings commenced before the amendment. The bench, comprising the Acting Chief Justice and Justice Sachin Datta , found this particularly pertinent as the parties had agreed to apply the amended Act for the substitution, and further noted several other "exacerbating aspects" in the arbitral proceedings that rendered the award unsustainable.

The appeal, FAO (COMM)-15/2021, was filed by M/S Dharamvir and Company against an order of the District Judge (Commercial Court) which had dismissed their application under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act) to set aside an arbitral award dated August 17, 2017.

Background of the Dispute

The dispute originated from an agreement for the construction of a boundary wall, leading to disagreements over alleged monetary entitlements of M/S Dharamvir and Company. An arbitrator was initially appointed by the DDA in 2014, and subsequently, a substituted arbitrator was appointed on March 10, 2015.

Following the Arbitration and Conciliation (Amendment) Act, 2015, which came into force on October 23, 2015, the appellant requested the appointment of an independent arbitrator as per the amended Act. Consequently, on January 3, 2017, the Engineer Member of DDA appointed Mr. S.P. Banwait (Retd.) ADG, CPWD, as the sole arbitrator. The appointment letter explicitly stated that the arbitrator was to decide "as per Arbitration and Conciliation Act 1996 as amended by The Arbitration and Conciliation (Amendment) Act, 2015 (3 of 2016)."

Mr. Banwait rendered an award on August 17, 2017, but it was published and sent to parties only on June 8, 2018, after the DDA paid the arbitration costs, including the appellant's share, due to a lien exercised by the arbitrator.

Appellant's Key Arguments

The appellant primarily contended that:

* The appointment of Mr. S.P. Banwait by the DDA was a unilateral appointment, violating Section 12 (5) of the amended A&C Act, which bars such appointments and renders the arbitrator de jure ineligible.

* The arbitrator misconducted himself by demanding enhanced fees and showing bias.

* The award was unreasoned and passed in contravention of natural justice principles.

Respondent's Defence

The DDA argued that:

* The challenge was beyond the scope of Sections 34 and 37 of the A&C Act.

* The appellant, having participated in the proceedings, could not challenge the arbitrator's appointment at a belated stage.

* The award was based on an appreciation of the material on record.

High Court's Analysis and Findings

Justice Sachin Datta , writing for the bench, meticulously analyzed the applicability of the amended A&C Act and the validity of the arbitrator's appointment.

Invalidity of Arbitrator's Appointment Post-Amendment

The Court emphasized that "unilateral appointment of arbitrator/s is an anathema to the provisions of the A&C Act, as amended." While the original arbitration commenced pre-amendment, the crucial factor was the appointment of the substitute arbitrator, Mr. S.P. Banwait , on January 3, 2017, after the Amendment Act came into force.

The Court noted: > "Thus, the parties agreed to make the Amendment Act applicable to the ongoing arbitration between the parties. The replacement/substitution of the arbitrator was also evidently occasioned due to this. The parties having opted to adopt and apply the provisions of the amended act in relation to the arbitral proceedings, it was not permissible for the Engineer Member, DDA to unilaterally appoint the sole arbitrator."

Citing the Supreme Court in Ellora Paper Mills Ltd. v. State of Madhya Pradesh , the High Court affirmed that the provisions of the amended Act would apply for re-constituting an arbitral tribunal even if it initially stood constituted prior to the amendment.

Regarding the DDA's argument that the appellant's participation constituted a waiver, the Court, relying on * Bharat Broadband Network Limited v. United Telecoms Limited *, held: > "Further, there was also no express agreement in writing between the parties whereby the provisions of Section 12 (5) of the A&C Act were waived. In the absence of an express agreement in writing in this regard, the participation of the appellant in arbitral proceedings cannot be construed as a waiver of his rights to object to the ineligibility of the arbitrator and/or object to the unilateral appointment of the sole arbitrator."

The Court concluded that since the composition of the arbitral tribunal was not in accordance with the law, Section 34 (2)(a)(v) of the A&C Act was attracted. It quoted the Supreme Court in CORE (supra) : "In case of a conflict, mandatory provisions of the Arbitration Act prevail over the arbitration agreement between the parties."

Other Exacerbating Irregularities in Arbitral Proceedings

The High Court also found several other serious irregularities that rendered the award unsustainable:

1. Unilateral Fee Enhancement: The arbitrator, despite fixing his fee initially, sought to enhance it and incorrectly justified it using inapplicable SAROD rules, deviating from the IVth Schedule of the A&C Act without party consensus, contrary to principles laid down in Oil and Natural Gas Corporation Ltd. v. Afcons Gunanusa JV .

2. Incongruity in Award Date: The award was dated August 17, 2017, but a communication dated August 16, 2017, recorded the arbitrator stating he would sign it on August 17, 2017.

3. Missing Pages in Award: The Court found "no rationale or justification offered for the missing pages of the award," making complete scrutiny impossible.

4. Impermissible Additions via Covering Letter: The covering letter dated June 8, 2018 (with which the award was finally sent) sought to add to the award's contents by dealing with merits, making new findings (including fraud allegations against the claimant), and attempting to modify the award by directing interest payment on fees.

5. Denial of Evidence: The appellant's request for production of relevant site records was denied without proper reason.

6. Unsubstantiated Findings and Apparent Bias: The award made findings of tampering and collusion by the appellant without material on record. The Court noted the arbitrator's own words in the award displayed animosity: > "The counsel for the claimant has addressed to me on 26.07.2017 which shows arrogance of the counsel and disrespect to the arbitral tribunal. In fact, the letter is contempt of the arbitral tribunal... He lacks manners... The claimant and his counsel dragged the issues beyond limit..."

The Court found the appellant's communication (an email dated 26.07.2017) did not warrant such sweeping observations. 7. Arbitrator's Derogatory Remarks in Section 34 Reply: The arbitrator, in his reply to the Section 34 proceedings, made further disparaging remarks about the appellant, calling him "miser, ill-mannered person," and stating, "To say that he is rouge will not be too much." The Court found these remarks justified the appellant's apprehension of impartiality.

The Verdict

Concluding that the arbitral award was unsustainable due to the invalid appointment of the arbitrator and numerous procedural irregularities demonstrating a lack of impartiality, the High Court allowed the appeal and set aside the impugned arbitral award dated August 17, 2017.

This judgment reinforces the critical importance of adhering to the amended provisions of the Arbitration and Conciliation Act concerning arbitrator neutrality and appointment, even in scenarios where original proceedings pre-date the amendments but involve subsequent re-constitution of the tribunal under an agreement to apply the amended law. It also serves as a strong reminder of the standards of conduct expected from arbitrators.