Madras HC: Unilateral Arbitrator Appointment Challenge Waived by Full Participation & Written Consent to Mandate Extension, Absent Seventh Schedule Disqualification (S.4 & S.12(5) Arbitration Act) - 2024-11-26

Madras High Court: Full Participation and Written Consent to Mandate Extension Waives Objection to Arbitrator's Appointment

Chennai, Tamil Nadu – November 26, 2024 – The Madras High Court, in a significant ruling on arbitration law, has held that a party that fully participates in arbitration proceedings and provides written consent to the extension of the arbitrator's mandate is deemed to have waived its right to object to the arbitrator's unilateral appointment, especially when the arbitrator is not disqualified under the Seventh Schedule of the Arbitration and Conciliation Act, 1996.

The Division Bench, comprising Chief Justice K.R. Shriram and Justice Senthilkumar Ramamoorthy , set aside a Single Judge's order that had annulled an arbitral award primarily on the grounds of the arbitrator's purportedly invalid unilateral appointment. The Bench also imposed costs of Rs. 10,00,000 on the respondents for their "mala fide" conduct.

Background of the Dispute

The case originated from a lease dispute between VR Dakshin Private Limited (formerly Sugam Vanijya Holdings Private Limited), a mall developer, and SCM Silks Private Limited, known for "The Chennai Silks " retail outlets. SCM Silks leased a large retail space in VR Dakshin's Chennai mall under a lease deed dated September 12, 2018, which included a 36-month lock-in period.

However, on December 14, 2018, SCM Silks terminated the lease, citing "unforeseen and unavoidable circumstances." VR Dakshin contended this termination was wrongful, invoked the arbitration clause (which allowed the lessor to appoint a sole arbitrator), and claimed damages. Hon'ble Mr. Justice A. Ramamoorthy , a former Madras High Court Judge, was appointed as the Sole Arbitrator by VR Dakshin.

SCM Silks participated in the arbitration proceedings without any objection to the arbitrator's appointment. Pleadings were filed, evidence was led, and witnesses were cross-examined. Crucially, when the arbitrator's mandate was nearing expiry, both parties jointly applied in writing on January 19, 2021, for an extension under Section 29A of the Act.

The Sole Arbitrator, in an award dated March 22, 2021, found the termination wrongful and awarded VR Dakshin Rs. 11,88,16,397 with interest and costs.

Challenge to the Award and Single Judge's Decision

Aggrieved by the award, SCM Silks challenged it under Section 34 of the Arbitration Act. For the first time, they raised objections to the Sole Arbitrator's appointment, arguing it was a unilateral appointment by an interested party (VR Dakshin, the lessor) and thus invalid under Section 12(5) read with the Seventh Schedule of the Act, citing Supreme Court precedents like Perkins Eastman Architects DPC v. HSCC (India) Ltd .

The learned Single Judge, by an order dated April 20, 2023, accepted this contention, set aside the arbitral award, and appointed a new arbitrator. VR Dakshin appealed this order to the Division Bench.

Arguments Before the Division Bench

VR Dakshin (Appellant) , represented by Senior Advocate Mr. P.S. Raman, argued: * SCM Silks never objected to the arbitrator's appointment throughout the proceedings. * The joint application for mandate extension under Section 29A, signed by both parties, constituted an express written waiver of any objection to the appointment. * The Sole Arbitrator, a former High Court Judge, was not disqualified under any category of the Seventh Schedule. * Supreme Court judgments like Perkins and TRF Ltd were distinguishable as objections were raised timely in those cases, and here, no bias was even alleged against the arbitrator. * Section 12(5) of the Act applies only if an arbitrator falls under the Seventh Schedule; if not, the proviso requiring express written waiver is also inapplicable. * Alternatively, Section 4 of the Act (deemed waiver) applied due to SCM Silks ' full participation without protest.

SCM Silks (Respondents) , represented by Mr. Anirudh Krishnan , contended: * The Perkins judgment rendered any unilateral appointment by an interested party (the lessor) void. * Section 12(5) mandates an "express waiver" in writing after disputes arise, which the joint memo for extension was not. * Participation in proceedings does not bar a challenge under Section 34 based on Section 12(5).

High Court's Rationale and Decision

The Division Bench allowed VR Dakshin's appeals, quashing the Single Judge's order. The Court's reasoning was multi-faceted:

1. Applicability of Section 12(5) and Seventh Schedule: The Court found that Section 12(5) becomes relevant if an arbitrator's relationship falls under the Seventh Schedule, making them ineligible. > "The admitted position is the Sole Arbitrator did not have any relationship with the parties or counsel or the subject matter and did not fall under any of the categories specified in the Seventh Schedule to become ineligible to be appointed as an arbitrator. Therefore, the proviso also will not be applicable, because the question of waiver will apply only when Section 12(5) of the Act is applicable. If Section 12(5) of the Act is not applicable at all, the question of waiving the applicability by an express agreement in writing also would not arise." (Para 20)

2. Express Waiver via Joint Application: The Court held that the joint application dated January 19, 2021, for extending the arbitrator's mandate constituted an express waiver in writing. > "From the manner in which the joint memo dated 19.1.2021 is worded, it is quite clear that the parties did not want to raise any objection. In our view, this would be an express waiver of the provisions of Section 12(5) of the Act." (Para 19)

3. Deemed Waiver under Section 4: The Bench emphasized that SCM Silks , by proceeding with arbitration without objection despite knowing the appointment mechanism and the subsequent Perkins judgment, had waived their right to object under Section 4. > "Respondents not only failed to object, but also actively participated and even consented for extending the time limit under Section 29A of the Act by joint memo dated 19.1.2021. Therefore, there will be a deemed waiver under Section 4 of the Act." (Para 21)

4. Conduct of Respondents Criticized: The Court strongly condemned SCM Silks ' conduct in raising the objection only after receiving an adverse award. > "The conduct of respondents smacks of dishonesty and if such conduct is encouraged by courts by interfering in such factual circumstances, it would only amount to encouraging dishonest parties protracting the litigations and using the court as a tool to achieve their dishonest objectives. The conduct of respondents actually amounts to abuse of process of court." (Para 23) > "It was only after receiving the arbitration award containing adverse findings, respondents in the petitions under Section 34 of the Act, for the first time, raised a dispute/objection with respect to the appointment of the Sole Arbitrator. It is amply clear that the conduct of the respondents is mala fide and nothing but an abuse of process of court." (Para 24)

5. Distinction from Precedents: The Court noted that in cases like Perkins and TRF Ltd , objections were raised during the arbitral proceedings, unlike the present case where no bias or impartiality was even alleged against the arbitrator.

6. Scope of Section 34: The Bench reiterated that the scope of judicial interference under Section 34 is limited and found that the Single Judge had not adequately demonstrated how the award met the criteria for being set aside. Further, the Single Judge exceeded jurisdiction by appointing a new arbitrator under Section 34.

Final Order and Implications

The High Court quashed the Single Judge's order dated April 20, 2023, and remanded the matter back to the Single Judge to decide on the other grounds raised in SCM Silks ' Section 34 petitions, particularly concerning the quantum of damages.

The Court imposed costs of Rs. 10,00,000 on SCM Silks , payable to VR Dakshin within four weeks, failing which their Section 34 petitions would stand dismissed.

This judgment underscores the critical importance of party autonomy in arbitration, coupled with the principle that objections to an arbitrator's appointment must be raised timely. Parties cannot, after fully participating in proceedings and even consenting to an arbitrator's continued mandate, turn around and challenge the appointment solely because the award is unfavorable, especially when no inherent disqualification or actual bias of the arbitrator is established.