Bombay High Court: Party Consent and Conduct Waive Arbitrator Ineligibility Under Section 12(5) ACA

Mumbai: In a significant ruling on arbitration law, the Bombay High Court has overturned a Commercial Court order that set aside an arbitral award on the ground of the arbitrator's ineligibility under Section 12(5) of the Arbitration and Conciliation Act, 1996 (ACA). The High Court held that the parties' express agreement in writing, subsequent to the disputes arising, along with their participation in the arbitration proceedings without objection, constituted a valid waiver of any perceived ineligibility.

The judgment was delivered by a division bench comprising Justices G. S. Kulkarni and Advait M. Sethna in a Commercial Arbitration Appeal filed by Mr. R. B. Krishnani , Proprietor of M/s. R. K. Krishnani , against M/s. STEM Water Distribution and Infrastructure Com. Pvt. Ltd.

Background of the Dispute

The dispute arose from an agreement dated 30 October 2013, under which M/s. R. K. Krishnani (Appellant/Original Claimant) was awarded water supply works by M/s. STEM Water Distribution and Infrastructure Com. Pvt. Ltd. (Respondent/Original Respondent). The contract contained an arbitration clause (Clause 17b) stating that in case of disputes, the "Member Secretary STEM (Respondent)" shall be the sole arbitrator.

Following a payment dispute over extra work, the Appellant invoked arbitration. The Respondent, through its advocate's letter dated 22 July 2019 and an earlier affidavit filed in prior court proceedings, expressly agreed and insisted on the appointment of Col. Vivekanand Choudhary (Retd.), the then Managing Director of the Respondent company, as the sole arbitrator, in line with the arbitration clause. The Appellant accepted this appointment.

The arbitration proceeded, with both parties participating, filing pleadings, and attending hearings. Notably, the Appellant even sought and obtained an extension of the arbitrator's mandate from the High Court under Section 29A of the ACA, a process in which the Respondent did not raise any objection regarding the arbitrator's eligibility. The sole arbitrator subsequently passed an award on 29 September 2020.

Commercial Court's Decision

The Respondent challenged the arbitral award under Section 34 of the ACA before the Commercial Court at Thane. The primary ground for challenge, and the sole reason for the Commercial Court setting aside the award, was the arbitrator's alleged ineligibility under Section 12(5) read with the Seventh Schedule of the ACA, as he was the Managing Director of the Respondent company. The Commercial Court found that this relationship fell under categories 1 and 5 of the Seventh Schedule, rendering him ineligible, and that no "express agreement in writing" for waiver, as required by the proviso to Section 12(5), was executed. The Commercial Court also referenced Sections 14 and 15 and considered this a patent illegality under Section 34(2A). The Commercial Court also permitted the Respondent to bring additional documents on record during the Section 34 proceedings.

Arguments on Appeal

The Appellant argued before the High Court that the Commercial Court's decision was erroneous. They contended that the Respondent's specific insistence on the appointment of their Managing Director, followed by the Appellant's acceptance, documented in writing (affidavit and advocate's letter), squarely met the requirement of an "express agreement in writing" under the proviso to Section 12(5), thereby waiving any ineligibility. The Appellant also highlighted the Respondent's active participation throughout the arbitration, including the Section 29A extension proceedings, as constituting waiver under Section 4 of the ACA and attracting the principle of estoppel. They argued that the arbitrator's subsequent retirement did not terminate his mandate, citing Supreme Court precedents like Himalayan Construction Co. v. Executive Engineer, Irrigation Division, J & K and Laxmi Continental Construction Company v. State of Uttar Pradesh . The Appellant further challenged the Commercial Court's decision to allow additional evidence in the Section 34 proceedings, contrary to established legal principles (referencing Alpine Housing Development Corporation Pvt. Ltd. v. Ashok S. Dhariwal & Ors. ).

The Respondent maintained that the arbitrator was ineligible under Section 12(5) and the Seventh Schedule. They questioned the validity of the written consent, alleging lack of Board approval. They also claimed to have lost confidence in the arbitrator and ceased participation at a certain stage, although they conceded not having pursued formal proceedings under Section 14 or 16 of the ACA to terminate the mandate.

High Court's Analysis and Ruling

The Bombay High Court meticulously examined the facts and legal provisions. The bench noted that the arbitration clause designated the "Member Secretary STEM" (later the MD) as the arbitrator, and it was the Respondent who actively insisted on appointing Col. Choudhary, their MD, as the sole arbitrator after the disputes arose. The Appellant accepted this.

The Court emphasized that this mutual agreement and the subsequent conduct of the parties were crucial. The bench held that the Respondent's letter and affidavit proposing and confirming the MD's appointment, accepted by the Appellant, constituted an "express agreement in writing, subsequent to disputes having arisen", perfectly fitting the proviso to Section 12(5). This waiver removed any potential ineligibility under that section.

The High Court further held that the Respondent's participation in the arbitration proceedings without raising timely objections under Section 16 (jurisdiction) or Section 14 (termination of mandate) amounted to a waiver of their right to object under Section 4 of the ACA.

Referencing the recent Constitution Bench decision in Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV) A Joint Venture Company , the Court reiterated that Section 12(5) overrides prior agreements but the proviso allows parties to waive this by express agreement after disputes arise, reinforcing "real and genuine party autonomy." The bench stressed that an objection to bias can be waived by express agreement or intentional relinquishment of a right.

On the point of the arbitrator ceasing to be MD during the proceedings, the Court, citing precedents, affirmed that unless the arbitration agreement specifies otherwise, an arbitrator appointed by designation does not lose their mandate upon retiring or ceasing to hold that office, especially when the appointment was agreed upon by the parties.

The High Court also strongly disapproved of the Commercial Court allowing additional documents in the Section 34 proceedings, affirming that Section 34 review is ordinarily limited to the record before the arbitrator and is a summary proceeding, not allowing for fresh evidence gathering.

The bench concluded that the Commercial Court had failed to appreciate the principles of waiver under both Section 12(5) proviso and Section 4, and erred in setting aside the award solely on the ground of ineligibility that had been validly waived by the parties' actions and written agreement.

Conclusion

The Bombay High Court allowed the appeal, quashing and setting aside the judgment and order of the Commercial Court dated 16 May 2023. The ruling underscores the importance of party autonomy and the principle of waiver in arbitration, particularly concerning arbitrator eligibility. It clarifies that even if a potential ground for ineligibility exists under Section 12(5), parties can, through clear conduct and subsequent written agreement after disputes arise, waive such ineligibility, and objections not raised promptly during the arbitration cannot typically be raised for the first time in Section 34 proceedings to set aside an award.

(Commercial Arbitration Appeal No. 8 of 2023, Coram: G. S. Kulkarni & Advait M. Sethna , JJ., Pronounced On: 21 April 2025)